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For Q < Q1 or Q > Q2 the firm faces a loss (negative profit). When output
is between Q1 and Q2, profit is positive. Marginal analysis shows that
profit is maximised at Q*, where MR = MC. This is shown as the largest
gap between the TR and TC curves, which coincides with the peak of
the profit function. Note that at Q*, the line tangent to the TR curve
(MR) is parallel to the line that is tangent to the TC curve (MC).
Therefore at the point of profit-maximisation, MR = MC.
Demonstration problem
Assume that a family-operated frozen yogurt outlet that sells its product
in a competitive market is facing the following price and cost
information
Market Price = $2 (per frozen yogurt)
What is this firm’s maximising quantity and what is its maximum profit?
Answer: