Why is “Does LRMC=MR” a worthwhile question to ask?

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Expert Solution

The objective of any business organization is to maximize its profit. When we talk about the monopolistically competitive market, the long run equilibrium is accomplished by the market by managing the market price, the total number of firms in the market and the scale of production of every firm.

These adjustments will indicate that every firm produces at a point which is tangent between its negatively sloped average revenue or demand curve and its long run average cost curve. This mainly occurs in the economies of scale part of the long run average cost curve. Two equilibrium points will be accomplished at this production level:-

MR=MC=LRMC

P=AR=ATC=LRAC

The first condition indicates that MR is equal to the marginal cost which indicates that each firm is maximizing profit and thus there is no motivation for the adjustment of its quantity of output or plant size.

Thus the question “Does LRMC=MR” is important to ask as it will indicate whether the firm is producing at its profit maximization level or there is a requirement for some adjustments.

Rahul Sunny answered 1 year ago

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