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JOURNAL OF LEADERSHIP, ACCOUNTABILITY AND ETHICS
How the Declining Marginal Utility of Rewards Accentuates
MR-MC Divergence at Profit Optimization
Author(s): Phil Grant
Citation: Phil Grant, (2011) "How the Declining Marginal Utility of Rewards Accentuates MR-MC Divergence at Profit Optimization," Journal of Leadership, Accountability and Ethics, Vol. 8, Iss. 5, pp. 91-102
Article Type: Research paper
Publisher: North American Business Press
Abstract:
In 2008 a mathematical proof refuting a long-standing principle in microeconomics was developed by the author. That economic principle says that firms, in order to optimize profit, should operate at a volume such that marginal revenue (MR) and marginal cost (MC) equate. The proof shows that, because volume is dependent on a key marginal cost (the rate of incentive pay), a firm’s optimal volume will necessarily be less than where MR = MC. This paper extends the previous proof to assess the impact on a firm’s optimal volume when the declining marginal utility associated with incentive pay is taken into account.
