Suppose a t-shirt manufacturer currently sells 5,000 t-shirts per week and makes a profit of $10,000 per week. a manager at the plant observes, "although the last 400 t-shirts we produced and sold increased our revenue by $4,000 and our costs by $4,800, we are still making an overall profit of $10,000 per week so i think we're on the right track. we are producing the optimal number of t-shirts

The firms profit would have been higher by $800 if it had not produced the last 400 units.

Explanation: The optimal quantity of a profit maximising producer is given by the condition,

MR=MC

It is only when the two are equal that the profit of the firm is maximised. At any quantity lower than the optimal quantity, MR>MC, so it is profitable for the producer to produce more units.

At any quantity above the optimal quantity, MR<MC, so it will be profitable to the producer to sell less units.

Here, as we can observe that the last 400 units increase revenue by only $4000 but cost by $4800. This means that MR of $4000 is less than MC of $4800. So it will be profitable for the producer to sell less units to be at the optimal level.

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