The profit-maximizing rule of production is to produce the level ...

[kshipps]

The profit-maximizing rule of production is to produce the level of output where price is equal to marginal cost. Since the marginal cost (MC) curve is U-shaped, the price line running horizontal to the X-axis intersects the MC curve at two points. How is the profit maximization rule applied in this case?

Question 2

At an output level above the profit-maximizing level, for a perfectly competitive firm, a reduction in output will:
 a. reduce total revenue more than total cost.
  b. reduce total cost more than total revenue.
  c. increase total revenue more than total cost.
  d. increase total cost more than total revenue.
  e. decrease total revenue and total cost by the same amount.

[cpetit11]

Answer to Question 1

The MC curve intersects the price line once when it is falling, and later when it is upward sloping. The firm continues to equate marginal cost and price by producing at the level of out-put where the MC intersecting the price line is positively sloped. At any output level below this, the firm can increase profit by raising output. In fact, the left-hand intersection between the MC and the price line, where the MC curve is negatively sloped, is the local minimum of profit (loss). It is only after this point that the market price exceeds the firm's marginal cost of production.

Answer to Question 2

b