Question

Which of the following conditions hold for a firm maximizing its profits?

Selling additional units will reduce profits.
Revenue gained from the next unit sold equals the cost of producing it.
Total revenue is maximized.
Total number of units sold is maximized.
Revenue gained from the next unit sold equals zero.

Answer 1

A profit-maximizing firm in a perfectly competitive market will make decisions based on its marginal revenue and marginal cost. This means that the firm will continue to produce and sell additional units as long as the marginal revenue from the next unit sold is greater than or equal to the marginal cost of producing it.

Step-by-step explanation:

A profit-maximizing firm in a perfectly competitive market will make decisions based on its marginal revenue and marginal cost. This means that the firm will continue to produce and sell additional units as long as the marginal revenue from the next unit sold is greater than or equal to the marginal cost of producing it. Total revenue is maximized when the firm produces and sells the quantity of output where marginal revenue is equal to marginal cost. Therefore, the conditions that hold for a firm maximizing its profits are:

1. Selling additional units will not reduce profits. Marginal revenue should be greater than or equal to marginal cost.
2. Revenue gained from the next unit sold equals the cost of producing it. Marginal revenue equals marginal cost.
3. Total revenue is maximized. Marginal revenue is equal to zero.
4. Total number of units sold is maximized. The firm continues to produce and sell units as long as marginal revenue is greater than or equal to marginal cost.
5. Revenue gained from the next unit sold equals zero. Marginal revenue is equal to zero.

Answer 2

A firm maximizes profits by producing an output level where marginal cost equals marginal revenue, not necessarily where total revenue or the total number of units sold is maximized. A higher market price increases total revenue for each quantity sold but does not guarantee maximum profits unless marginal revenue equals marginal cost.

Step-by-step explanation:

The conditions that hold for a firm maximizing its profits are not listed in the question options. A firm maximizes profits by adjusting the output level such that the revenue gained from the next unit sold (marginal revenue, MR) equals the cost of producing it (marginal cost, MC). At this point, any additional production would either not add to profits or start to reduce them because MC would be greater than MR. Total revenue is not necessarily maximized because the firm prioritizes profit over revenue, and thus doesn't always seek to maximize the total number of units sold.

Given a certain market price, as long as that price (MR in perfect competition) is above the average cost (AC) at the profit-maximizing quantity, the firm is making a profit. As price levels affect total revenue, a higher price increases total revenue for every quantity sold, and vice versa for a lower price. However, a profit-maximizing firm is more concerned with marginal revenue equalling marginal cost, rather than the total revenue or the number of units sold being at their highest.

If the price drops below AC, the best the firm can do is minimize losses, producing at an output level where total revenue is closest to total costs, hence minimizing the gap between the two.

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