The MR = MC rule applies:
a. to firms in all types of industries.
b. only when the firm is a “price taker.”
c. only to monopolies.
d. only to purely competitive firms.
The correct answer and explanation is :
The correct answer is a. to firms in all types of industries.
Explanation:
The MR = MC rule (Marginal Revenue = Marginal Cost) is a fundamental principle in economics that applies to all firms, regardless of the market structure in which they operate. It refers to the point where a firm maximizes its profit by producing the quantity of output where its marginal revenue (MR) equals its marginal cost (MC). At this point, the firm’s cost of producing an additional unit of output is exactly equal to the revenue it receives from selling that unit, thus maximizing its profit or minimizing its loss.
This rule applies across various market structures, including:
- Perfect Competition (Purely Competitive Firms):
In a perfectly competitive market, firms are “price takers,” meaning they cannot set the price and must accept the market price. For these firms, the marginal revenue is equal to the market price because each additional unit is sold at the same price. They maximize profit where MR = MC. - Monopolies:
A monopoly, unlike a perfectly competitive firm, is a “price maker,” meaning it has the power to set the price by controlling the quantity of output. Even though monopolies have the ability to influence prices, they still apply the MR = MC rule to maximize their profits. The difference is that for a monopoly, the marginal revenue curve is downward sloping due to the price effect, whereas, for a perfectly competitive firm, the MR curve is horizontal. - Monopolistic Competition:
Firms in monopolistic competition have some price-setting power due to differentiated products but face competition from other firms offering similar products. These firms also apply the MR = MC rule to maximize profit. - Oligopolies:
Oligopolistic firms operate in markets with a few dominant firms. Like monopolies, they are not price takers, but they still use the MR = MC rule, though the interdependence between firms can complicate decision-making.
In all these industries, the MR = MC rule is essential for maximizing profits or minimizing losses. The strategy may vary in execution due to market characteristics, but the principle remains consistent.