Question

How will you draw the MR curve to show the equilibrium of the firm in terms of the equality between MR and MC?

Answer 1

To show the equilibrium of the firm using the MR (Marginal Revenue) and MC (Marginal Cost) approach, we must draw a diagram illustrating the point at which

MR  = MC and MC cuts MR from below

This is the profit-Maximizing output level for the firm.

1. MR Curve:

• • In perfect competition, the MR curve is a horizontal straight line because marginal revenue remains constant at all output levels (price = AR = MR).
  • In imperfect competition, the MR curve slopes downward, but the equality condition still applies.

1. MC Curve:

• • The MC curve is U-shaped due to the law of variable proportions.
  • It first falls and then rises.

1. Equilibrium Condition:

• • The firm is in equilibrium at the output level where MR = MC.
  • Additionally, MC must cut the MR curve from below, indicating that beyond this point, producing additional units will result in higher costs than revenue thus reducing profit.