Question

Explain why profits are largest when mc=mr and not when mr>mc ? and is there a difference between sales revenue maximizing and profit maximizing?

Answer 1

A typical marginal revenue curve is downward sloping meaning that with more quantity purchased the marginal revenue for each next unit is lower than for the previous unit. On the other hand, a typical marginal cost curve is upward sloping meaning that each new unit comes at a higher cost than the previous unit. When MR = MC, it implies that the producer has taken full benefit of the higher MR and lower MC and selling any more units (beyond the point where MR = MC) would be at a cost which is higher than the revenue for each new unit. Hence this is the profit maximising output. When MR > MC, it implies that there are still a few (or at least one) unit go to for which profit can be extracted.

The difference between profit maximization and revenue maximisation is that revenue can still be maximizing by selling more units than the profit maximising (MR = MC) output. Revenue is maximized when MR = 0, because any more units will yield negative revenue. The units between the points when MR = MC and when MR = 0 add to revenue but at a cost which is higher than revenue, resulting in negative profits for this region. So revenue maximization would be at less tha maximum profit.