Do firms really calculate marginal cost and marginal revenue to find the profit-maximizing output? If you examine the accounting records of most small businesses, you will be hard pressed to find explicit calculations of marginal cost and marginal revenue. So, why do economists develop rather elaborate, formal models of profit maximization when no one seems to do what we say they do?

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31-03-2022
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Do firms really calculate marginal cost and marginal revenue to find the profit-maximizing output? If you examine the accounting records of most small businesses, you will be hard pressed to find explicit calculations of marginal cost and marginal revenue. So, why do economists develop rather elaborate, formal models of profit maximization when no one seems to do what we say they do?

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Tundexi Tundexi · Answer 1 · 2022-04-06T11:05:41+02:00

It is a true statement that firms calculate their marginal cost and marginal revenue to find the profit-maximizing output.

What is marginal cost?

A Marginal cost refers to the change in total cost when output is increased by one unit.

What is marginal revenue?

A Marginal revenue refers to the change in total revenue when output is increased by one unit.

In conclusion, generally, a total profit is maximized where marginal revenue equals marginal cost, thus, they need to be calculated to realize that.