if a profit maximizing firm fa

Answer – The profit maximizing firm earn maximum profit whereits marginal cost is equal to marginal revenue. It means MC = MR isthe basic condition for profit maximization. MR is twice as steepsloped as demand curve. The MR curve hit X-axis when demand curvereaches at its half. We draw a perpendicular at point where MR hitx-axis. This perpendicular intersect demand curve at its mid point.We know that elasticity is equal to one at midpoint of demandcurve.

The firm is earning maximum profit at the point where elasticityis equal one. It means MR must be equal to MC this point. At thisoutput level MR is ‘zero’ therefore marginal cost (MC) must bezero. Look at the diagram. Output measured on x-axis and price,revenue and cost are measured on y-axis. MR hit x-axis at point’Q’. This is also a profit maximizing output point. Thus MC willequal to MR. The price will be ‘P*’.