Question

Why does profit maximization occur where the marginal revenue from the last unit sold             equals the marginal cost from the last unit produced? Can an oligopoly sustain long-run          economic profit? Explain.

Answer 1

Marginal analysis is a significant in determination of profit maximization. The role of marginal analysis in economics becomes pivotal because it helps in reducing and minimising the wastage of resources.

Marginal revenue is the the additional revenue earned from the sale of one more unit. Marginal cost is the additional cost that is paid by the firm in producing that unit. It is logical that marginal revenue should be equal to the marginal cost because if, the marginal revenue is less than the marginal cost, it implies that firm is receiving less for the additional unit relative to what it is paying. So it should reduce production in this case.

If the marginal revenue is greater than the marginal cost, it is receiving more for the additional unit relative to what it is paying. So it should increase production in this case. Combining these two scenarios, the optimum production that maximizes profit occurs when the marginal revenue and the marginal cost of the last units produced are equal.

Oligopolies can definitely sustain long run profits because they have strong entry barriers that prevent entry of new firms in the long run. This may include economies of scale, licensing, and other barriers. This helps in in restricting the number of firms and available substitutes