Under the traditional profit maximisation hypothesis, a firm should expand output as long as
MR exceeds MC
Under the traditional hypothesis the firm aims to maximise total profit \(\pi = TR - TC\). Profit is at a maximum where \(\dfrac{d\pi}{dQ} = MR - MC = 0\), that is \(MR = MC\), with MC cutting MR from below.
Step 1 — Each extra unit adds MR to revenue and MC to cost, so it changes profit by \(MR - MC\).
Step 2 — As long as \(MR \gt MC\), every additional unit adds to total profit, so the firm should expand output.
Step 3 — When \(MR = MC\) profit is maximised; beyond it \(MC \gt MR\) and each extra unit reduces profit.
AR exceeding AC shows only that the firm earns supernormal profit at that output, not whether one more unit would raise profit. MC exceeding MR is the signal to cut output. Total revenue exceeding total cost means the firm is profitable overall, which says nothing about the marginal unit.
MR exceeds MC option is correct.
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