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Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.
If the last unit produced adds more to costs than to revenue, its production must necessarilyreduce profits (or increase losses). On the other hand, profits must increase (or losses decrease)so long as the last unit producedthe marginal unitis adding more to revenue than to costs. Thus, so long as MR is greater than MC, the production of one more marginal unit must beadding to profits or reducing losses (providedprice is not less than minimum AVC). When MChas…

risen to precise equality with MR, the production of this last (marginal) unit will neither addnor reduce profits. In pure competition, the demand curve is perfectly elastic; price is constant regardless of thequantity demanded. Thus MR is equal to price. This being so, P can be substituted for MR in theMR = MC rule.

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