Mon 7 Apr, 2014 11:01 am
In an economics test question in a perfectly competitive economy, MR=MC at 6 units of output. In this same scenario, profit (TR less TC) for 5 units was $70 at 5 units. 6 units of output was also $70.
The theory as I understand it is that a company will continue to manufacture product until the MC=MR as otherwise they will lose out on profit potential. So, why would the profit not increase between making 5 units and 6 units of product. In this case MR-MC was $14 for 5 units.
Appreciate your explanation!
That's because the last employee added to the manufacturing is "eating" up all the vmpl it adds to the firm, aka his marginal production (mp) is worth his exact production value in fee paid.
therefore the profit is the same at 5 or 6 units. you need to go off the assumption that given an indifference between 5 or 6 units, the company will always prefer to manufacture the maximum amount of units, meaning 6, regardless of no gained profit vs 5.