The value of the difference between price and marginal cost is a measure of profit per unit only if:
A)marginal cost equals marginal revenue.
B)marginal cost equals average revenue.
C)average cost is greater than marginal revenue.
D)average cost equals marginal cost.

Question

Quizplus · Accepted Answer

The value of the difference between price and marginal cost is a measure of profit per unit only if the firm's average cost equals marginal cost. This is because when marginal cost equals average cost, the firm is producing at the efficient scale and there are no remaining economies or diseconomies of scale. At this point, the firm's total costs are being minimized, and any profits made from sales above the average cost therefore represent additional profit per unit. If the firm's average cost is greater than marginal revenue, the firm is operating at a loss and will not be earning any profits. Answers A and B are incorrect because they do not provide a sufficient condition for measuring profit, and answer C is incorrect because it conflates the relationship between average cost and marginal revenue.

The Value of the Difference Between Price and Marginal Cost