Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Marginal Revenue equals Marginal Cost
B
Total Revenue exceeds Total Costs
C
Average Cost is minimized
D
Price is greater than Average Variable Cost
Understanding the Answer
Let's break down why this is correct
Answer
For a firm to maximize profit when increasing its output, the additional revenue from selling more products must be greater than the additional costs incurred in producing them. This is known as the principle of marginal cost and marginal revenue. If the firm can sell one more unit of its product for $10, but it costs $7 to produce that unit, the firm earns an extra $3 in profit. However, if the cost rises to $12 for the next unit, the firm would actually lose money by producing it. Therefore, the key condition for profit maximization is ensuring that the revenue from each additional unit sold exceeds the cost of producing that unit.
Detailed Explanation
For a firm to maximize profit, it needs to produce until the money it makes from selling one more unit (marginal revenue) is equal to the cost of making that unit (marginal cost). Other options are incorrect because Some might think that just having more total money coming in than going out means profit; Minimizing average cost sounds good, but it doesn't guarantee profit maximization.
Key Concepts
Profit Maximization
Marginal Analysis
Market Equilibrium
Topic
Profit Maximization for Firms
Difficulty
medium level question
Cognitive Level
understand
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