When marginal revenue equals marginal cost, the firm:

• A. should shut down immediately
• B. is maximizing its profit
• C. is operating at a loss
• D. should increase its output to maximize profit

Answer: (B)

Verified step by step guidance

1. Understand the economic principle that profit maximization occurs where marginal revenue (MR) equals marginal cost (MC). This is because producing one more unit adds as much to revenue as it does to cost, so profit is maximized at this point.
2. Recall that if MR > MC, the firm can increase profit by producing more, and if MR < MC, the firm should produce less to avoid losses on additional units.
3. Recognize that when MR = MC, the firm is neither gaining nor losing profit by changing output, indicating an optimal production level.
4. Note that this condition does not imply the firm should shut down or that it is necessarily operating at a loss; rather, it is the point where profit is maximized given the cost and revenue structure.
5. Therefore, the correct interpretation of MR = MC is that the firm is maximizing its profit.