Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A firm maximizes profit when marginal revenue equals marginal cost.
B
Profit maximization occurs when total revenue is greater than total costs by the largest amount.
C
A firm should increase production as long as marginal cost is less than average total cost.
D
A firm can maximize profit by setting prices above the market equilibrium price.
E
Profit maximization is only relevant for monopolies and not for firms in competitive markets.
Understanding the Answer
Let's break down why this is correct
Answer
To maximize profit, firms need to follow a few important conditions. First, they should produce at a level where their marginal cost, which is the cost of making one more unit, equals their marginal revenue, the money earned from selling that unit. This means if the cost to produce an extra item is the same as the money they get from selling it, they are in the right spot for profit maximization. For example, if a bakery finds that making one more loaf of bread costs $2 and selling it brings in $2, they are maximizing their profit at that production level. Additionally, firms should also consider factors like market demand and competition, as these can influence both costs and revenues.
Detailed Explanation
None of the statements accurately describe how firms maximize profit. Other options are incorrect because This statement suggests that profit is maximized when the extra money made from selling one more item equals the extra cost of making that item; This implies that profit maximization happens when the total money earned is more than total costs by the biggest amount.
Key Concepts
Profit Maximization
Marginal Analysis
Market Structures
Topic
Profit Maximization for Firms
Difficulty
medium level question
Cognitive Level
understand
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