Marginal Cost (MC) equals Marginal Revenue (MR): This is the primary condition. A firm should continue to produce as long as the additional revenue from selling one more unit (MR) is greater than the additional cost of producing that unit (MC). When MR equals MC, the firm has produced all units that add to its profit, and producing more would lead to a decrease in profit.
2. Marginal Cost (MC) curve must be rising and cut the Marginal Revenue (MR) curve from below: This is the second-order condition, which ensures that the equilibrium point is indeed a point of maximum profit (or minimum loss). If MC = MR but MC is falling, increasing output further would actually increase profits, meaning the firm is not yet at its equilibrium. Therefore, MC must be rising at the point where it intersects MR.
Why Option 2 is not correct: MC > MR- If marginal cost is greater than marginal revenue, the firm is losing money on the last unit produced. In this situation, the firm should reduce its output to increase profit or minimize loss. This is not an equilibrium condition.
