Profit Maximization Rule (MR = MC)
What is Profit Maximization Rule (MR = MC)?
Profit is maximized when marginal revenue equals marginal cost.
If MR > MC, producing more adds to profit; if MR < MC, producing less increases profit. At MR = MC, the firm produces the quantity where the additional revenue from the last unit equals its additional cost.
Profit Maximization Rule (MR = MC): a worked example
A firm sells every unit at a fixed $20, so marginal revenue is $20 throughout. Marginal cost is $14 for the fourth unit, $18 for the fifth and $22 for the sixth. Unit four adds 20 - 14 = $6 to profit and unit five adds 20 - 18 = $2, so both are worth making. Unit six adds 20 - 22 = -$2, so it is not. Say profit at three units is $30. Then four units gives 30 + 6 = $36, five gives 36 + 2 = $38, and six would drop it back to 38 - 2 = $36. Profit peaks at five units and $38.
The mistake students make with profit maximization rule (mr = mc)
Students pick the quantity where marginal cost is lowest, reasoning that the cheapest unit to make must be the most profitable place to stop. The rule compares the last unit's revenue against the last unit's cost, not against other units' costs, so output should keep growing past minimum marginal cost while MR still exceeds MC. A second error is using MR = MC to decide whether to produce at all. That quantity rule answers how much; the shutdown decision compares price to average variable cost.
Profit Maximization Rule (MR = MC) questions
Does producing where MR equals MC guarantee a profit?
Producing where marginal revenue equals marginal cost does not guarantee a profit. The rule finds the best quantity given the firm's costs, whatever that best turns out to be. If average total cost at that quantity is above the price, the firm is minimizing a loss rather than making money. Checking profit means comparing price to average total cost after the quantity is chosen, not before.
Why not produce where profit per unit is highest?
Profit per unit peaks where average total cost is at its minimum, but firms maximize total profit, not profit per unit. Units beyond that point earn a thinner margin and still add to the total, so stopping early throws away real money. The firm keeps expanding while each extra unit brings in more than it costs, which is exactly the point where marginal revenue falls to marginal cost.
Does MR equals MC apply to monopoly as well as perfect competition?
The MR equals MC rule applies in every market structure, including monopoly, oligopoly and monopolistic competition. What changes is what marginal revenue equals. For a price taker marginal revenue equals the market price, so the condition becomes P = MC. For a price maker marginal revenue sits below price, so the profit-maximizing price ends up above marginal cost and the quantity ends up smaller.
Formula / Example
This is the live Perfect Competition sandbox. Drag the curves, or open the full version.
Related terms
The same idea in another course
Why setting MR equal to MC worksMR equals MC is the first-order condition of a calculus optimization problem: profit is the objective function and the profit-maximising quantity is its critical point. On CalcLearn, a sister site.
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated