Why will a profit-maximizing firm never choose to produce at a quantity where marginal cost exceeds marginal revenue?

a. Draw the marginal cost/marginal revenue graph and use it to help you explain.

b. Which two lines on a cost curve diagram intersect at the zero-profit point?

Solutions

Expert Solution

a) The reason is that the marginal revenue exceeds the marginal cost.

Additional profit means adding more profit than its actual price.

FMC is greater than r then profits can be increased by reducing the outputs produced.

This is known as profit maximization under perfectly competitive market.

b) The two points that intersects the zero-profit point is the average cost curve in marginal revenue curve.

If the average cost curve is below the marginal revenue curve then the firm is set to make profits at the selected level of output.

The four year the average cost curve and the marginal revenue curve intersect each other.

Rahul Sunny answered 1 year ago

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