Why is the level of output at which marginal revenue equals marginal cost the profit maximizing...

Why is the level of output at which marginal revenue equals marginal cost the profit maximizing output?

Expert Solution

Profit Maximizing occurs when marginal revenue is equal to marginal cost

Let's understand why at MR = MC a firm achieves the maximum profit.

Marginal Revenue

It refers to the change in total revenue when additional units are sold. So it can be said that marginal revenue is the additional revenue generated from selling an additional unit.

Marginal Cost

It refers to the change in total cost when additional units are produced. So it can be said that marginal cost is the additional cost occurred from producing an additional unit.

Suppose MR>MC this means additional revenue generated from selling an additional unit is greater than the additional cost from producing additional units which means a firm is achieving profit hence the producer will continue to produce until MR is equal to MC

Suppose MR<MC this means additional revenue generated from selling an additional unit is lesser than the additional cost from producing additional units which means a firm is having a loss hence the producer will decrease the production until MR is equal to MC

That's why a producer produces where marginal revenue is equal to marginal cost as this a point where a firm achieves the maximum profit.

Rahul Sunny answered 6 months ago

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marginal revenue equals marginal cost to maximize total revenue

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