Answer to Question #316859 in Microeconomics for Welcome

Question

Explain why any firm maximizes profit or minimizes losses when the marginal cost is equal to marginal revenue?

Answer 1

For the classical economy, the following assumptions are used to understand profit maximization:

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

2. It's worth noting that profit maximization occurs only when the difference between total revenue and total costs is the greatest.

3. A company can make the most money if its production archives output when marginal revenue (MR) = marginal cost (MC)

When a company produces less than five outputs, its marginal income exceeds its marginal cost. As a result, for any additional output up to 5, the firm will earn more revenue than it spends on expenditures, resulting in a gain in overall profit.

On the other hand, if output is increased beyond the ideal level, which is beyond 5, the marginal cost will exceed the marginal revenue. Because the expense of manufacturing more would be more expensive than the income obtained, a drop in profit level would be seen.

At the level of output when all other overhead costs deduct less from the total income obtained from the sale of the products, economic advantages, profit, or marginal revenue can be fully produced.

Production of additional outputs that would otherwise provide profit margin but are uneconomical, i.e., include pricey inputs that do not balance marginal cost and marginal revenue.