When marginal revenue product equals marginal revenue cost, what is the implication for a profit-maximizing firm?

• A. The firm is operating at a loss and should exit the market.
• B. The firm is maximizing its profit with respect to the input.
• C. The firm should increase its use of the input to maximize profit.
• D. The firm should decrease its use of the input to maximize profit.

Answer: (B)

Verified step by step guidance

1. Understand the definitions: Marginal Revenue Product (MRP) is the additional revenue generated from employing one more unit of an input, while Marginal Revenue Cost (MRC) is the additional cost of employing that extra unit of input.
2. Recall the profit-maximizing condition for input use: A firm maximizes profit by employing inputs up to the point where the marginal revenue product equals the marginal revenue cost, i.e., \(\text{MRP} = \text{MRC}\).
3. Interpret the equality \(\text{MRP} = \text{MRC}\): At this point, the revenue gained from the last unit of input exactly equals the cost of that input, so the firm has no incentive to change the quantity of the input used.
4. Analyze what happens if \(\text{MRP} > \text{MRC}\): The firm can increase profit by using more of the input because the additional revenue exceeds the additional cost.
5. Analyze what happens if \(\text{MRP} < \text{MRC}\): The firm should reduce the input usage to increase profit since the cost of the input exceeds the revenue it generates.