Why is the level of output at which marginal revenue equals marginal cost the profit-maximizing output?
What will be an ideal response?
The easiest way to explain this is to explain why it cannot be otherwise. If marginal revenue exceeds marginal cost, then the firm can add to its profits by expanding production until marginal revenue no longer exceeds marginal cost (either because the price declines eventually or diminishing returns set in and marginal cost rises or both). If, on the other hand, marginal revenue is below marginal cost, it would not be rational for the firm to expand production to this level. Why add more to your costs than you add to your revenues since that means smaller profits?
If the firm would not produce when marginal revenue exceeds marginal cost, or when marginal revenue is less than marginal cost, then it must maximize profits where marginal revenue equals marginal cost.
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What will be an ideal response?
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What will be an ideal response?