2.11.2 (HL)—Rational producer behaviour

A rational producer compares marginal benefit with marginal cost.

Profit is maximized where the next unit adds no more revenue than cost, subject to the firm’s demand, technology and legal constraints.

Example

If a firm’s marginal revenue is $12 and marginal cost is$9 at the current output, expanding output can raise profit until the comparison reverses.

Use MR=MC as a decision rule, then check whether the firm can actually sell the extra output.

Rational behaviour is a model assumption, not a claim that every manager has perfect information or identical goals.

Profit $=TR-TC$. Marginal values are changes per extra unit: $MR=\Delta TR/\Delta Q$ and $MC=\Delta TC/\Delta Q$; profit is maximized where $MC=MR$ with MC rising through MR. At that output, $AR>AC$ gives abnormal profit, $AR=AC$ normal profit and $AR<AC$ a loss; total profit is $(AR-AC)\times Q$. Calculate $AR=TR/Q$ and $AC=TC/Q$ from data when needed.