Profit is maxmized at the level of output where the cost of producing an additional unit of output (MC) equals the revenue that would be received from that additional unit of output (MR). Thus, the firm will not produce that unit. When the production level reaches a point that cost of producing an additional unit of output (MC) exceeds the revenue from the unit of output (MR), producing the additional unit of output reduces profit. The law of (the reality of) diminishing marginal productivity demonstrates that adding input will eventually reduce production and increase cost. Maximum profit is the level of output where MC equals MR.Īs long as the revenue of producing another unit of output (MR) is greater than the cost of producing that unit of output (MC), the firm will increase its profit by using more variable input to produce more output. ![]() ![]() Determining Profit Maximizing Level of Production - Marginal Cost and Marginal Revenue
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