Question

Show graphically that equilibrium of the producer (firm) is at the level of output where marginal cost equals marginal revenue.

Show graphically that profit is maximum where marginal cost equals marginal revenue.

Answer 1

In economics, a firm reaches equilibrium (profit maximisation) when:

1. Marginal Cost = Marginal Revenue (MC = MR)
2. MC curve cuts the MR curve from below (i.e., MC is rising at the point of intersection)

These conditions ensure that the firm earns maximum profit and has no incentive to increase or reduce output.

• The MR curve is a horizontal line (under perfect competition).
• The MC curve is U-shaped.
• Points R and K are where MC = MR.
• At Point R, MC = MR but MC is falling (cuts MR from above) → Not equilibrium.
• At Point K, MC = MR and MC is rising (cuts MR from below) → This is the equilibrium point.