Question

The necessary condition for a firm's equilibrium is

• A. MR = MC
• B. MR>MC
• C. MR<MC
• D. MR = MC = 0

Hint:

The golden rule of profit maximization for any firm is: produce where Marginal Revenue equals Marginal Cost (MR = MC).

Answer 1

The Correct Option is A

A firm is in equilibrium when it is maximizing its profits and has no incentive to change its level of output. The universal rule for profit maximization is to produce at the quantity where the marginal revenue (MR) from the last unit sold is exactly equal to the marginal cost (MC) of producing that last unit. As long as MR>MC, the firm can increase profits by producing more. If MR<MC, the firm can increase profits by producing less. Profit is maximized where MR = MC.