Question

Apply the marginal principle to determine the profit-maximizing price and output. Try these problems: 2, 21

Short answer

Totalprofit will stop increasing when marginal cost equals marginal revenue because we will be losing money on any new products sold at that point.

As a result, when the condition, marginal cost = marginal revenue, is met, profits will be maximized.

Step-by-step solution

Defining marginal profit

First, let's define marginal profit. A firm or individual earns a marginal profit when one additional or marginal unit is produced and sold. The profit will be maximized to the extent that the total profit is maximized.

Profit maximizing price and output

The overall profit continues to rise as long as the marginal cost is less than or equal to the marginal revenue because it suggests that we would still make a profit on each new product sold.

Totalprofit will stop increasing when marginal cost equals marginal revenue because we will be losing money on any new products sold at that point.

As a result, profits will be maximized when marginal cost equals marginal revenue.