Question 5 [12]

Explain with the aid of a relevant diagram (you have to draw the diagram) how profit is

maximised when marginal revenue equals marginal cost. On the diagram, indicate the lost

profit from producing too little (Q) and selling at too high a price (P). On the diagram, also

indicate the lost profit from producing too much (Q) and selling at too low a price (P). (6)

Briefly discuss the diagram to illustrate your understanding of the concept (and diagram). (6)

Tip: You have to draw a diagram that shows the MC and AC curves, as well as the MR and AR curves. Price and quantity changes must clearly be indicated on the diagram. Interpret the diagram and discuss it to show your understanding.