Question

The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because if ________?

1) marginal revenue and marginal cost are equal, economic profits will be zero.
2) marginal revenue and marginal cost are equal, any other output level will result in reduced profits.
3) marginal revenue is less than marginal cost, producing more will increase profits.
4) marginal revenue is greater than marginal cost, producing more will lower profits.

Answer 1

Marginal revenue and marginal cost being equal indicates the level of output that maximizes a firm's profits, as producing more would either not change or decrease profits.

Step-by-step explanation:

The equality of marginal revenue and marginal cost is crucial for profit maximization across all market structures. The correct statement in the question provided is: if marginal revenue and marginal cost are equal, any other output level will result in reduced profits.

This means when marginal revenue (MR) equals marginal cost (MC), producing additional units will not increase profits and may actually reduce them. If MR is greater than MC, producing more can increase profits up to the point where they are equal. Conversely, if MC exceeds MR, producing more will reduce profits. Firms will aim to adjust output to the point where MR = MC since this is the quantity at which profits are maximized, easily identified on a graph where MR and MC intersect.