Arizona State University (ASU) ECN212 Microeconomic Principles Exam 1 Practice

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What condition maximizes profit for firms?

When total costs exceed total revenue

When marginal revenue exceeds marginal cost

When marginal cost equals marginal revenue

The condition that maximizes profit for firms occurs when marginal cost equals marginal revenue. This is a fundamental principle in microeconomics that indicates the optimal level of production for a firm. When a firm produces up to the point where its additional cost of producing one more unit (marginal cost) matches the additional revenue generated from selling that unit (marginal revenue), it ensures that it is not leaving potential profit on the table.

Producing beyond this point would mean that the cost of producing one more unit would be greater than the revenue generated from selling it, leading to a decrease in overall profit. Conversely, producing less means the firm is forgoing potential revenue that could exceed the costs involved. Thus, the equilibrium where marginal cost equals marginal revenue is essential for maximizing profit, as it reflects a balance where the firm is efficiently allocating its resources to maximize financial returns.

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When all costs are fixed

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