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.

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 2 years ago

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