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Applying the Marginal Decision Rule
The slope of the total revenue curve is marginal revenue; the slope of the
total cost curve is marginal cost. Economic profit, the difference between
total revenue and total cost, is maximized where marginal revenue equals
marginal cost. This is consistent with the marginal decision rule, which
holds that a profit-maximizing firm should increase output until the
marginal benefit of an additional unit equals the marginal cost. The
marginal benefit of selling an additional unit is measured as marginal
revenue. Finding the output at which marginal revenue equals marginal
cost is thus an application of our marginal decision rule.
Figure 9.7 "Applying the Marginal Decision Rule" shows how a firm can use
the marginal decision rule to determine its profit-maximizing output. Panel
(a) shows the market for radishes; the market demand curve (D), and
supply curve (S) that we had in Figure 9.3 "The Market for Radishes"; the
market price is $0.40 per pound. In Panel (b), the MR curve is given by a
horizontal line at the market price. The firm’s marginal cost curve (MC)
intersects the marginal revenue curve at the point where profit is
maximized. Mr. Gortari maximizes profits by producing 6,700 pounds of
radishes per month. That is, of course, the result we obtained in Figure 9.6
"Total Revenue, Total Cost, and Economic Profit", where we saw that the
firm’s total revenue and total cost curves differ by the greatest amount at
the point at which the slopes of the curves, which equal marginal revenue
and marginal cost, respectively, are equal.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
483
