Question

For every market, which condition has to be fulfilled for firm's equilibrium?

• A. AR = MC
• B. MR = MC
• C. MC curve intersects the MR curve from below
• D. Both (B) and (C)

Hint:

The two golden rules for a firm's profit-maximizing equilibrium are: (1) MR = MC, and (2) MC must be rising (i.e., cut MR from below).

Answer 1

The Correct Option is D

A firm is in equilibrium when it produces the level of output that maximizes its profit. This occurs when two crucial conditions are met, regardless of the market structure (perfect competition, monopoly, etc.):

Necessary Condition (MR = MC): The firm should produce at the level where the marginal revenue (MR) from selling one additional unit is exactly equal to the marginal cost (MC) of producing that unit. As long as MR>MC, the firm can increase profit by producing more. If MR<MC, it can increase profit by producing less. Profit is maximized where they are equal.
Sufficient Condition (MC cuts MR from below): At the point of equilibrium, the marginal cost curve must be rising. This ensures that for any output beyond the equilibrium point, MC will be greater than MR, preventing the firm from wanting to expand production further.
Therefore, both conditions (B) and (C) must be satisfied for a firm to be in a stable equilibrium.