Explain why a firm maximizes its profits by producing the level of output at which marginal...

Explain why a firm maximizes its profits by producing the level of output at which marginal revenue equals marginal costs.

Solutions

Expert Solution

Since the profit-maximizing condition is

MR=MC

Since marginal revenue is the additional revenue by selling an additional unit of output.

Marginal revenue is change in the total revenue due to an additional units is sold.

MR=TRn-TRn-1

Marginal cost is the addition in total variable cost due to producing an extra unit of output. It means when an additional unit of output is produced and there is an addition in the total variable cost, then this additional cost is called marginal cost.

MC=TVCn-TVCn-1

Since the profit-maximizing condition is

MR=MC

When MR is greater than MC, then profit can be increased until MR and MC become equal because additional revenue is greater than the additional cost by producing an additional output.

When MR is less than MC, then profit can be increased until MR and MC become equal because additional revenue is less than the additional cost by producing an additional less output.

It means profit will be maximized when MR and MC are equal.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A. Explain in detail why a firm maximizes its profit by producing the level of output...

A. Explain in detail why a firm maximizes its profit by producing the level of output at which marginal revenue equals marginal cost. B. Explain in detail how mutual interdependence impacts oligopoly markets. C. Explain in detail how managers make use of Lock-in market power to increase market share for the firm.

Question 37 A monopolist maximizes profits by a. producing an output level where marginal revenue equals...

Question 37 A monopolist maximizes profits by a. producing an output level where marginal revenue equals marginal cost. b. charging a price equal to marginal revenue and marginal cost. c. charging a price where marginal cost equals average total cost. d. Both a and b are correct. Question 38 A monopoly is an inefficient way to produce a product because a. it faces a downward-sloping demand curve. b. it can earn both short-run and long-run profits. c. the cost to...

If a profit-maximizing firm is producing an output level in which marginal revenue exceeds marginal cost,...

If a profit-maximizing firm is producing an output level in which marginal revenue exceeds marginal cost, should it produce more, less or the same? Why? What is the profit-maximizing quantity for any firm to produce?

1. A monopolist maximizes profits at the output at which A) total revenue is at its...

1. A monopolist maximizes profits at the output at which A) total revenue is at its greatest, assuming that the firm has both fixed and variable costs. B) price equals marginal cost. C) price exceeds marginal cost by the greatest amount. D) none of the above 2. Which of the following is true of marginal revenue earned by a monopolist that charges a single price to all its consumers? A) Marginal revenue earned by a monopolist is equal to the...

Suppose a firm is producing a level of output such that marginal revenue is equal to...

Suppose a firm is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $6 per unit and is incurring average variable costs of $7 per unit and average total costs of $8 per unit. Given this information, it may be concluded that the firm: Group of answer choices is operating at maximum total profit is operating at a loss that could be reduced by shutting...

A firm is currently producing 80 units of output. At this level of output produced: its...

A firm is currently producing 80 units of output. At this level of output produced: its average total cost is 100 (ATC = 100 ) The market price per unit of output is 120 MR = 40 MC = 20 i. Is this firm making profits or losses? How much? ii. Are they maximum profits? Why? iii. If your answer to part ii was no, what does this firm have to do with maximize its profits? A firm's total cost...

1. Firm X is producing the quantity of output at which marginal revenue equals marginal cost....

1. Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is earning A. a positive economic profit. B. an economic loss. C. a normal profit. D,There is not enough information to answer the question. 2. A perfectly competitive firm will always maximize short-run profits by producing the level of output where the average total cost is minimized. A.True B.False

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?

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?

7) In order to maximize profits, the firm should adjust its output level to that point...

7) In order to maximize profits, the firm should adjust its output level to that point at which marginal cost equals average revenue. This statement is true for 1. perfect competition 2. monopoly 3. monopolistic competition 4. oligopoly A) 2 and 3 B) 2, 3, and 4 C) 1 and 3 D) 1 only

Subjects