Which of the following is the first-order condition for profit maximization in economics?

By: Prof. Dr. Fazal Rehman | Last updated: February 3, 2024

Question:  Which of the following is the first-order condition for profit maximization in economics?

A    Marginal Revenue (MR) equals Marginal Cost (MC)

B    Average Total Cost (ATC) is minimized

C   Price (P) is greater than Average Variable Cost (AVC)

D   Total Revenue (TR) is maximized

Answer:   Marginal Revenue (MR) equals Marginal Cost (MC)

 

 

Condition Description
Marginal Revenue (MR) equals Marginal Cost (MC) ·        It is the first-order condition for profit maximization.

·        It implies that producing one more unit of output increases revenue by the same amount as it increases cost.

Total Revenue (TR) exceeds Total Cost (TC) ·        Profit maximization occurs when total revenue from producing and selling goods or services is greater than the total cost of production.
Price (P) exceeds Average Variable Cost (AVC) ·        A firm should produce as long as the price per unit exceeds the average variable cost per unit.
Producing at the point of lowest Average Total Cost (ATC) ·        Firms aim to produce at the level where average total cost is minimized, allowing for higher profit margins.
Satisfying market demand and consumer preferences ·        Meeting customer demand and providing products or services that align with consumer preferences
Adaptation to changing market conditions ·        Firms must be flexible and responsive to evolving market conditions, adjusting production levels and strategies as needed.
Effective cost management and resource allocation ·        Efficient use of resources and cost control are vital for maximizing profits by reducing production expenses.

 

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