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Why does a firm earn maximum profits by producing the amount of output where marginal revenue is equal to marginal cost? |
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Answer» Profits will be highest at that level of output where marginal cost coincides with the marginal revenue, i.e., MC = MR. A firm will go on expanding its level of output so long as an extra unit of output adds more to revenue than to cost. Since it will be profitable to do so. The firm will not produce an additional unit of the product which adds more to cost than to revenue because to produce that unit will mean losses. Thus, a firm will go on expanding output as long as marginal revenue (MR) exceeds marginal cost (MC) of Production. The level of output where marginal revenue (MR) and marginal cost (MC) equals is the point of maximum profit. |
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