Question

To maximize profits, a firm should produce every unit of output where

• A. Price > Average Variable Cost > Marginal Cost.
• B. Marginal Revenue > Marginal Cost > Average Variable Cost.
• C. Price > Average Total Cost > Marginal Cost.
• D. Average Total Cost > Average Variable Cost > Marginal Cost.

Hint:

A price taker's revenue curve is flat because it cannot influence market price.

Answer 1

The Correct Option is B

A profit-maximising firm should keep producing additional units as long as the revenue from each one, its Marginal Revenue, exceeds the cost of producing it, its Marginal Cost, since \(MR > MC\) means that unit adds more to revenue than to cost.
The firm should also only keep operating, rather than shutting down entirely, in the range where marginal cost stays above Average Variable Cost, since operating below AVC means losses would exceed what shutting down would cost.
Combining both conditions, the firm should produce every unit where \(MR > MC > AVC\), matching option 2.