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For a profit-maximising firm to be in equilibrium, two conditions must hold. The first is MR = MC. What is the second condition?
AThe AC curve must equal the AR curve
BThe MC curve must cut the MR curve from above
CThe MC curve must cut the MR curve from below
DThe MR curve must be downward sloping
Answer & Solution
Correct answer: C. The MC curve must cut the MR curve from below
1. MR = MC alone can be satisfied at two output levels on a U-shaped MC curve.
2. At the lower output, MC cuts MR from above, which is not a profit maximum.
3. True equilibrium needs MC rising through MR, i.e. cutting it from below.
4. This second-order condition means MC has a positive slope at equilibrium.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.4_
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