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Fundamentals of Economics , Second Edition
William Boyes, Arizona State University
Michael Melvin, Arizona State University
3. The Profit Maximizing Rule: MR = MC
Chapter 5: Costs and Profit Maximization


3. The Profit Maximizing Rule: MR = MC
  1. Graphical Derivation of the MR = MC Rule
    Profit is at maximum when marginal revenue equals marginal cost. MR is the additional revenue obtained from selling one more unit. MC is the additional cost incurred from selling one more unit of output. If MR exceeds MC, expand production. If MC exceeds MR, decrease production. When MR = MC, profits are maximized.
    Teaching Strategy: Carefully graph the data in Figure 2 to show that profits are maximized at the output where MR = MC.
    Teaching Strategy: Relate MR to the price elasticity of demand. Since total revenue (TR) rises in the priceelastic region of the demand curve, MR is positive in that elastic region; also, since TR declines in the inelastic region of the demand curve, MR must be negative in that inelastic region. Refer carefully to Figure 2 when describing these relationships.
    Total fixed costs are the costs that must be paid whether the firm produces or not. Total variable costs are the costs that rise or fall as production rises or falls.
    Total costs = TFC + TVC.
  2. What Have We Learned? Recap the profit maximizing rule, and stress the difference between accounting and economic profits.


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