To determine when profits are maximized, we need to consider the relationship between marginal revenue (MR) and marginal cost (MC).
1. Understanding Profit Maximization:
- Profit maximization occurs when a company achieves the highest possible difference between total revenue (TR) and total cost (TC).
2. Marginal Revenue (MR) and Marginal Cost (MC):
- Marginal revenue is the additional revenue that one more unit of a good or service will bring. It is the change in total revenue from selling one more unit.
- Marginal cost is the additional cost incurred from producing one more unit of a good or service. It is the change in total cost from producing one more unit.
3. Profit Maximization Condition:
- To maximize profits, a firm should produce up to the point where the marginal cost of producing an additional unit is equal to the marginal revenue from selling that additional unit. Thus, the condition for profit maximization is MR = MC.
4. Analyzing the Options:
- Let's go through the given options regarding the relationship between marginal revenue and marginal cost:
a. Set: This doesn’t describe a relationship that dictates a specific value or condition for profit maximization.
b. Less than market price: This option doesn’t reflect a profit-maximizing condition directly related to both marginal revenue and marginal cost together.
c. Equal: If marginal revenue equals marginal cost (MR = MC), the firm is maximizing its profits. Any production beyond this point would cause MC to exceed MR, reducing profit.
d. Greater than market price: This similarly does not describe the profit-maximizing condition specifically involving both MR and MC.
5. Conclusion:
- After reviewing the concepts and options, the best answer for maximizing profits is when marginal revenue equals marginal cost.
Therefore, the correct answer is:
c. equal
