Many marginal cost curves are U-shaped. As a result, it is possible that the MC

Question

Many marginal cost curves are U-shaped. As a result, it is possible that the MC curve hits the demand or price line at two output levels. Which is the profit maximizing output? Why? O A. Profit is maximized when MC equals price; therefore, either quantity will maximize profit. O B. When MC intersects demand at two points, profit must be computed at both points to determine which one maximizes profit. 0 D. Profit is maximized when MC intersects demand from below because at any quantity greater than this MC is greater than marginal revenue.

Explanation / Answer

Profit-maximizing condition

MR= MC and MC should be rising when cutting the MR or demand curve.

Although usually MC curve is U shaped it means it cuts demand curve or price at two points one when MC is decreasing and one when MC is increasing. But the profit-maximizing condition is when MC cuts demand curve when it is rising because producing after this point MC is less than MR. So at this point profit is maximised.

Hence option D is the correct answer.

Option D is profit is maximised when MC intersects the demand curve from below because at any quantity greater than this MC is greater than this MR curve.

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