A firm maximizes profits when:
A) total revenue equals total cost.
B) average revenue equals average cost.
C) marginal revenue equals marginal cost.
D) fixed revenue equals fixed cost.

Question

Quizplus · Accepted Answer

A firm maximizes profits when the marginal cost of production equals the marginal revenue from the sale of each additional unit. This is because the marginal cost represents the additional cost incurred to produce one more unit of output, while the marginal revenue represents the additional revenue received from selling that unit. Therefore, when marginal revenue is greater than marginal cost, a firm should produce more output, and when marginal cost is greater than marginal revenue, a firm should produce less output. At the point where marginal revenue equals marginal cost, the firm is producing the optimal level of output where profits are maximized.

A Firm Maximizes Profits When