Explain why a firm maximizes its profits by producing the level of out

Explain why a firm maximizes its profits by producing the level of output at which marginal revenue equals marginal costs.

What will be an ideal response?

ANSWER

Profit is equal to the difference between total revenue and total cost. Marginal revenue is the addition to total revenue when an additional unit of output is produced and sold. Marginal cost is the addition to total cost when an additional unit of output is produced. So long as MR > MC, more is added to total revenue than is added to total cost. As such, the difference between total revenue and total cost, i.e., profit, increases. When MR < MC, more is added to total cost than is added to total revenue. In this case, the difference between total revenue and total cost, i.e., profit, decreases.