Final answer:
Businesses use marginal analysis to find their profit-maximizing output by comparing marginal cost and marginal revenue. Production should increase as long as MR > MC and decrease once MR < MC, with profits maximized when MR equals MC.
Step-by-step explanation:
Businesses determine their profit-maximizing output through marginal analysis, a technique based on the relationship between marginal cost (MC) and marginal revenue (MR). When a business is considering whether to produce additional units, it looks at the cost of producing one more unit (MC) versus the revenue this unit will generate (MR). If MR exceeds MC, the firm should increase production since each additional unit contributes to overall profits. Conversely, if MC surpasses MR, the firm should reduce production to maximize profits.
For instance, if a business produces 4 units with MR being $600 and MC being $250, it is advantageous to produce another unit, as it will boost profits. When production reaches a point where MR equals MC, as observed in a monopoly scenario where the fifth unit has MR of $400 and MC of $400, profits are maximized, and producing further would decrease profits. Therefore, the optimal output level is where MR equals MC.
The profit-maximizing output level might sometimes be within a range. For example, profit could be the same between 70 and 80 units, but the signal to cease production expansion is when MR = MC, occurring precisely at 80 units in this scenario, indicating no additional profit gain beyond this point.