What does it mean for marginal cost to equal marginal revenue?

When marginal cost equals marginal revenue, it indicates that a firm is maximizing its profit. This is because marginal cost represents the cost of producing one additional unit of a good, while marginal revenue is the additional revenue generated from selling that unit. When these two values are equal, the firm is not incentivized to produce more or fewer units, as producing additional units would not increase profit (as the cost of producing an extra unit would equal the revenue gained from selling it).

At this point, the firm has achieved optimal production levels. If marginal cost were to exceed marginal revenue, the firm would incur losses on additional production and thus would reduce output. Conversely, if marginal revenue exceeded marginal cost, the firm could increase profit by producing more. Therefore, the equilibrium of marginal cost and marginal revenue directly corresponds to the profit-maximizing output level for a firm.