How the Declining Marginal Utility of Rewards Accentuates MR-MC Divergence at Profit Optimization

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.