The profit-maximizing rule MC = MR is followed by:
A) a monopoly, but not a perfectly competitive firm.
B) a perfectly competitive firm, but not a monopoly.
C) both a monopoly and a perfectly competitive firm.
D) neither a monopoly nor a perfectly competitive firm.

Question

Quizplus · Accepted Answer

The profit-maximizing rule MC = MR is followed by both a monopoly and a perfectly competitive firm. In a perfectly competitive market, individual firms are price takers and have no market power to influence the price. Therefore, their marginal revenue equals the market price, and since the market price is equal to the marginal cost for a perfectly competitive firm, the profit-maximizing rule is MC = MR = P. In a monopoly, the firm has market power and can influence the price by reducing its output. Therefore, the marginal revenue for a monopolist is less than the price, and the profit-maximizing rule is still MC = MR, but the price charged will be higher than the marginal cost.

The Profit-Maximizing Rule MC = MR Is Followed By