Answer to Question #144244 in Microeconomics for Sikelelo

Question

explain why any firm maximises profit, or minimises losses, when marginal cost is equal to marginal revenue

Answer 1

To understand profit maximization the following assumptions are considered for the classical economy:

1. Profit = Total Revenue (TR) – Total Costs (TC).

2. It should be noted that profit maximization only occurs at the biggest gap between total revenue and total costs.

3. Conventionally, A firm can realize maximum profits if its production archives output when marginal revenue (MR) = marginal cost (MC)

Marginal revenue is greater than the Marginal Cost when a firm produces less than 5 outputs. Therefore, for any extra output but not more than 5, the firm is enjoying more revenue than it is incurring on the costs and there will be an increase in total profit.

 

On the contrary, if the output is increased past the optimal output that is past 5, the marginal cost will be greater than marginal revenue. A fall in profit level shall be felt because the cost of producing additional would be expensive more than the revenue realized.

Economic benefits or profit or marginal revenue can be maximally produced at the level of output where all other overhead costs deduct less from the total revenue realized from the sale of the outputs. 

Production of additional outputs that would as well create profit margin but uneconomical, that is, incorporates expensive inputs that do not balance the marginal cost and marginal revenue.