levo
Log inStart

Costs, Revenues, Profits and the Growth of Firms

Profit maximisation and the MC = MR rule

  • 3 things to know
  • All three components

Overview

Rule for profit maximisation by a firm, second condition for profit maximisation at MC = MR and short run shut-down condition for a firm.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Key term

State the rule for profit maximisation by a firm.

Key term

Why does a firm not maximise profit where marginal revenue exceeds marginal cost?

Key term

Why is a firm producing beyond the point where MC = MR not maximising profit?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    State the rule for profit maximisation by a firm.

    Model answer

    A firm maximises profit at the output where marginal cost equals marginal revenue. Marginal cost must also be rising through marginal revenue at that output.

  2. 2

    Why does a firm not maximise profit where marginal revenue exceeds marginal cost?

    Model answer

    An extra unit adds more to revenue than to cost while marginal revenue exceeds marginal cost. The firm therefore raises total profit by producing that unit and should expand output.

  3. 3

    Why is a firm producing beyond the point where MC = MR not maximising profit?

    Model answer

    Each unit beyond that output adds more to cost than it adds to revenue. A cut in output back to the MC = MR level therefore raises total profit.

  4. 4

    What is the second condition for profit maximisation at MC = MR?

    Model answer

    Marginal cost must be rising and cutting marginal revenue from below. The lower intersection, where marginal cost is falling, gives maximum loss instead.

  5. 5

    Define profit.

    Model answer

    Profit is the difference between total revenue and total cost. Profit is positive whenever revenue exceeds cost over the period.

  6. 6

    How is total profit shown on a cost and revenue diagram?

    Model answer

    Total profit is the gap between average revenue and average cost at the chosen output. The gap is multiplied by the quantity sold to give the profit area.

See the rest and revise

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.

1Closed book
2Open book
3Closed book

The 3-step method, run for you

Answer cold, learn it, then prove it stuck. Levo tracks the jump between your first attempt and your last.

Scarcity, Choice and the Economic Problem
Demand, Supply and Market Equilibrium
Elasticities of Demand and Supply
The Labour Market

Cram a whole paper in one sitting

Sort every topic into what you know and what you do not, then drill only the weak ones.

British was sold in 1984.
TelecomGasSteel

Blank Blitz makes facts automatic

Rapid timed gap-fills on the terms and numbers you need to recall without thinking.

ASaving is income households choose not to spend.
BTaxation is income taken by the government.
CMoney spent on imports leaves the domestic flow.

Build It gets the exam shape right

Assemble a full-mark answer from its marking points, in the order an examiner wants them.

Limit pricing keeps a newcomer out.
TrueFalse

Test It catches misconceptions

Spot the fault in a statement. The traps are the mistakes students actually make.

721941163128510

Brain Breaks between sessions

Short focus games to reset attention, so the next set lands better than the last.

Every question in Costs, Revenues, Profits and the Growth of Firms, on a schedule.

Attempt a question from memory, write the correct version, then attempt it again. Levo records the jump between your first attempt and your last, and brings each question back on the day you are due to forget it.

Start revising, £5 a monthSee how the method works

Or £46 a year, about £3.83 a month. Cancel anytime.