Suppose that a firm determines that its marginal revenue is greater than its marginal cost, it would better to
It is profitable for a firm to continue employing additional resources as long as
produce and increase its output.
When a firm calculates its marginal revenue (MR) and compares it to its marginal cost (MC), the decision to produce and increase output is based on the fundamental principle of profit maximization. If the firm determines that its MR is greater than its MC, it indicates that the additional revenue gained from producing one more unit of output exceeds the additional cost incurred.
To understand how to calculate marginal revenue and marginal cost, follow these steps:
1. Determine the revenue generated from selling an additional unit of output. This can be done by measuring the change in total revenue resulting from a change in quantity. For example, if selling 10 units generates a total of $1,000 and selling 11 units generates a total of $1,200, the change in revenue is $1,200 - $1,000 = $200.
2. Calculate the change in quantity of output. In the previous example, the change in quantity would be 11 - 10 = 1 unit.
3. Calculate the marginal revenue by dividing the change in revenue by the change in quantity. So, in the example above, MR would be $200 / 1 unit = $200.
4. Determine the additional cost incurred from producing one more unit of output. This can include costs such as labor, materials, and overhead expenses.
5. Compare the marginal revenue with the marginal cost. If MR > MC, it means that the firm can generate more revenue from the additional unit of output than the cost incurred to produce it. In this case, it is more profitable for the firm to produce and increase its output.
It's important to note that profit maximization relies on continuously reassessing the relationship between MR and MC. As long as MR is greater than MC, the firm should continue to produce and increase output. However, if MR becomes lower than MC, it may be more beneficial for the firm to reduce output or even stop production to avoid loss.