Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms maximize profit when marginal cost equals marginal revenue.
B
Firms should always minimize marginal cost regardless of revenue.
C
Marginal cost has no effect on profit maximization.
D
Profit is maximized when marginal cost is at its highest.
Understanding the Answer
Let's break down why this is correct
Answer
Marginal cost is the extra cost a firm incurs when it produces one more unit of a product. For a firm to maximize its profit, it needs to make sure that the revenue from selling that additional unit is greater than the marginal cost of producing it. When a firm produces up to the point where marginal cost equals marginal revenue, it is maximizing its profit because producing more would lead to higher costs than the money earned. For example, if a toy company finds that making one more toy costs $5 but sells for $10, it would keep producing until the cost of making an additional toy equals the selling price. Therefore, understanding the relationship between marginal cost and profit helps firms make better decisions about how much to produce.
Detailed Explanation
Firms make the most money when the cost of making one more item (marginal cost) is the same as the money they earn from selling that item (marginal revenue). Other options are incorrect because Some might think that cutting costs is always best; It's a common mistake to think costs don't matter for profits.
Key Concepts
marginal cost
Topic
Profit Maximization for Firms
Difficulty
easy level question
Cognitive Level
understand
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