Final answer:
A firm maximizes profits where marginal cost equals marginal revenue and not necessarily when total revenue or the number of units sold is maximized. At this point, producing less or more would not increase profits. Total revenue should exceed total costs by the greatest amount to ensure maximum profits.
Step-by-step explanation:
When a firm is maximizing its profits, certain conditions hold true. Correctly identifying these conditions helps in understanding how firms make production decisions in different market scenarios. The firm must balance the cost of producing each additional unit against the revenue it will bring in, which is determined by the market price. Therefore, the following statements are true when a firm is maximizing profits:
- Profit maximization occurs where the revenue gained from the next unit sold (marginal revenue) equals the cost of producing it (marginal cost). This is the condition where selling additional units will not increase profits, and producing any less would not either.
- The total revenue and total cost curves are essential to understand the profit-maximizing output level. Where these two curves are closest to each other, with total revenue exceeding total cost or losses being minimized, indicates the profit-maximizing quantity.
- It is a misunderstanding to think that total revenue or the total number of units sold is maximized at profit maximization; instead, it's the difference between total revenue and total cost that needs to be the greatest.
- When a firm is making losses due to market price being below average cost, the best it can do is to reduce losses by producing the quantity where the loss is smallest.