Economics Profit Maximization Questions
A firm determines its optimal level of output for profit maximization by analyzing the relationship between its costs and revenues. It aims to produce the quantity of goods or services that will generate the highest possible profit. This is achieved by comparing the marginal cost (MC) and marginal revenue (MR) of each additional unit produced. The firm will continue to increase production as long as MR exceeds MC, as this indicates that producing an additional unit will contribute positively to overall profit. The optimal level of output is reached when MC equals MR, as any further increase in production would result in diminishing returns and reduced profitability.