Question

Write three conditions of profit maximisation.

Hint:

To maximise profit, a firm must produce at the output level where MR = MC and ensure that total revenue exceeds total costs.

Answer 1

Step 1: Condition 1 – Marginal Revenue equals Marginal Cost.
Profit is maximised when the additional revenue from selling one more unit (MR) is equal to the additional cost of producing that unit (MC).

Step 2: Condition 2 – Total Revenue exceeds Total Cost.
Profit is maximised when the total revenue generated from sales is greater than the total cost of production. This ensures positive profit.

Step 3: Condition 3 – Diminishing Returns.
As production continues, the marginal product of inputs begins to decline. Profit maximisation occurs when the firm adjusts its production level to balance costs and revenues effectively.