Question

As output increases, total revenue increases, but total costs also increase. Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost? Can this same principle be applied to minimize a loss

Answer 1

First you have to understand the the shape of the curve of marginal cost and marginal revenue where marginal revenue is a decreasing curve and marginal cost is an increasing curve where initially the distance between marginal revenue and marginal cost is maximum as a result of which the marginal profit is maximum in the initial stage and as you go on the marginal profit reduces but is still positive and that is the reason why why this positive merger profit ads on to the total profit and keeps on increasing but after the level of output where the marginal cost exceeds marginal revenue the marginal profit becomes negative and it gets subtracted from the total profit as a result of which you can understand that only till the level of output where the marginal revenue = marginal cost the marginal profit is positive and the profit increases and after that it decreases and that is the reason why the profit-maximizing level of output is when the marginal revenue = marginal cost and yes it can be applied to minimise the loss as well because minimum loss for a situation can be the maximum profit one can achieve