Question

The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the

a. last unit produced adds more to costs than to revenue, and its production must necessarily increase profits or reduce losses.
b. firms make a profit.
c. the last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.
d. firms experience the law of diminishing marginal returns.

Answer 1

The correct answer is option c.

Step-by-step explanation:

A firm is able to maximize its profit when the marginal revenue earned is equal to the marginal cost incurred. This is true for all market structures whether competitive or imperfect competition.

When the output is produced at the point where marginal revenue and marginal cost are equal, it implies that the last unit produced is adding more to revenue than to costs. And the production of the last unit is increasing profits or reducing losses.

At this point, the marginal profit is zero when the marginal profit becomes negative it implies that the total profit is decreasing. so for profit maximization marginal profit should be zero or marginal revenue should be equal to marginal cost.