Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36
Firms In Competitive Markets
Section 7 of 24
…
Table 2 here
…
In the table 2 example of the Vaca family farm
· column 4 profit is maximized
· when the farm produces 4 or 5 gallons of milk
· for a total profit of $7
The Vacas can find the profit-maximizing quantity for each marginal (additional) gallon produced by comparing
· column 5 Marginal Revenue (MR)
· column 6 Marginal Cost (MC)
…
Column 5 computes MR from change in total revenue as quantity Q increases by 1 gallon
Column 6 computes MC from change in total cost as Q increases by 1 gallon.
Column 7 shows the change in profit MR-MC for each additional gallon produced.
Quantity of 1 has
· a Marginal Revenue of $6
· a Marginal Cost of $2
· a change in profit of +$4
Q of 2 has
· a MR of $6
· a MC of $3
· a change in profit of +$3
Q of 5 has
· a MR of $6
· a MC of $6
· a change in profit of $0
Q of 6 has
· a MR of $6
· a MC of $7
· a change in profit of -$1
…
As long as MR exceeds MC
· an increase in sales revenue exceeds increase in costs required to get that extra revenue
· increasing Q increases profit
… …

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