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7. Why do we claim that “MR=MC” is a so-called “cardinal rule” in production theory?

7. Why do we claim that “MR=MC” is a so-called “cardinal rule” in production theory?

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Answer #1

In production theory

Cardinal Rule is Marginal revenue(MR) = Marginal cost(MC) because at MR= MC producers maximizes their profits.

If MR > MC the firm should continue producing more as long as MR is greater than MC as it is profitable for the firm.

If MR < MC the firm should reduce production to maximize total revenue as MC is greater than MR which is reducing profits of the firm because of marginal losses as MC > MR.

Hence, the firm is at equilibrium at MR = MC and does not wish to deviate from this level of output as it will lead to a reduction in the profits of frim. The firm maximizes its profits at MR = MC.

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