For a competitive firm, which of the following conditions describes the profit maximization condition?
I. P = MC
II. MR = MC
III. TR = TC
A) II only
B) I and II only
C) II and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

For a competitive firm, profit is maximized when the marginal revenue (MR) – which is the change in total revenue resulting from an additional unit of output – equals the marginal cost (MC) – which is the change in total cost resulting from an additional unit of output. Therefore, condition II (MR = MC) is necessary for profit maximization. Additionally, firms in a competitive market can only influence the price at which they sell their products to some degree. Thus, the price they can charge is equal to their marginal revenue. Therefore, condition I (P = MC) is also important for profit maximization in competitive markets. Finally, condition III (TR = TC) is not a necessary condition for profit maximization, as profit is not the same thing as total revenue minus total cost.

For a Competitive Firm, Which of the Following Conditions Describes