Question

which of the following offers the best explanation of why \marginal revenue equals marginal cost\ is the rule that indicates the profit - maximizing output level?
a. if output were increased from the profit - maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.
b. because the firm colludes with other similar firms to set price equal to marginal cost.
c. the marginal revenue is equal to the marginal cost at all levels of output for a perfectly competitive firm.
d. if output were reduced from the profit - maximizing level, then the firm would be gaining marginal revenue that exceeds marginal cost, and thus increasing the level of profit.

Explanation:

• Option b is incorrect because collusion is not related to the general profit-maximization rule of MR=MC; this rule applies to all firms, not just colluding ones.
• Option c is wrong: in perfect competition, marginal revenue equals price, not marginal cost at all output levels—MR=MC only at the profit-maximizing output.
• Option d is incorrect: reducing output below the profit-maximizing level would mean the firm gives up units where marginal revenue exceeds marginal cost, decreasing profit, not increasing it.
• Option a is correct: when output is beyond the profit-maximizing level, each additional unit adds more to cost than to revenue, so profit falls, which explains why MR=MC is the profit-maximizing point (any deviation reduces profit).

Answer:

a. If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.