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Explain why the optimal point of production is where MR = MC

Explain why the optimal point of production is where MR = MC

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Answer #1
  • The point at which MR=MC, the firm earns maximum profit.
  • At this level, the firm determines the maximizing output and price level at which it can earn maximum profits.
  • When the MR =MC, profit reaches its maximum point.
  • The firm will continue its production until MC=MR
  • If the marginal revenue exceeds the marginal cost, the firm starts earning Economic profits on each unit of output produced.
  • But when marginal revenue falls beyond marginal cost,it starts incurring losses on each unit of output.
  • At this point the firm should reduce its level of production.
  • Hence the optimal point of production is at the level where MR=MC
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