What is the profit maximizing rule for firms? (i.e. how do they decide what output to produce?) b. Explain why this approach will maximize profits for a firm.
Ans:
Expand output until MR = MC.
If MR> MC, then can get making some profit on each unit, so expand. If MC>MR, then losing money on each unit, so cut back. This must end in the middle, where MR = MC.
Note: this is not setting total revenue = total cost. That would be zero profits. Instead it is calculated at the marginal (the next unit) level.
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