Question

Business Economics:

1- Explain why the P=MC rule leads firms to the optimal level of production in competitive markets

2- Explain how the MR=MC rule helps a monopoly to determine its optimum quantity

3- Contrast the relationship between the MR=MC rule and the P=MC rule

4- Describe the shut down rule

Answer 1

1.

In a competitive market, it is given that P=MR and profit maximization condition implies that MR=MC hence it is concluded that P=MC in this case.

2.

For a monopoly, the marginal revenue curve lies below the demand curve means more can be sold by lowering the price. The level of optimal quantity is when MR=MC as quantity lower than competitive level is sold at a higher price.

3. Both are same but differ for different markets in the competitive firms demand equals marginal revenue curve so MR=MC holds and in the monopoly, MR=MC implies profit maximization however not P=MC

4.

Shut down rule implies when the price falls below average variable cost then firm would shut down and bear fixed cost whereas if the price is above average variable cost but does not cover average total cost then economic losses occur but the firm would still operate till it bears variable costs.