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The theory of the firm analyses profit maximising business by exploring the behaviour of revenues and costs. Average revenue and average cost are denoted as AR and AC respectively. Marginal revenue and marginal cost are denoted as MR and MC respectively.
At which point will a producer maximise profit?
A)MR = AC
B)MR = MC
C)AR = ACMarginal revenue = extra revenue when one more unit is sold
Marginal cost = extra cost when one more unit is made.Provided MR > MC it is worth making and selling another unit.
If MC > MR the extra unit is not worthwhile.Profit is maximised when all additional profits have been made without incurring any additional costs and this will occur just when MR = MC.
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