Which of the following offers the best explanation of why "marginal revenue equals marginal cost" is the rule that indicates the profit-maximizing output level?
A) If output were reduced from the profit-maximizing level, then the firm would be gaining marginal revenue that exceeds marginal cost, and thus increasing the level of profit.
B) If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.
C) Because the firm colludes with other similar firms to set price equal to marginal cost.
D) The marginal revenue is equal to the marginal cost at all levels of output for a perfectly competitive firm.

Question

Quizplus · Accepted Answer

At the profit-maximizing output level, the marginal revenue is equal to the marginal cost. If the firm were to produce more output, the marginal cost would exceed the marginal revenue, and thus decrease the level of profit. If the firm were to produce less output, it would be gaining marginal revenue that exceeds marginal cost, leaving room for additional profit. Therefore, the profit-maximizing output level is where marginal revenue equals marginal cost.

Which of the Following Offers the Best Explanation of Why