Association of Chartered Certified Accountants (ACCA) Certification Practice Test

To maximize profits in the short run, at what point will firms be willing to supply?

1. When average cost equals average revenue

2. When marginal cost equals marginal revenue

3. When total revenue exceeds total cost

4. When fixed costs are minimized

The correct answer is: When marginal cost equals marginal revenue

To maximize profits in the short run, firms will choose to supply output at the point where marginal cost equals marginal revenue. This is a fundamental principle in microeconomics that helps determine the optimal level of production for a firm. When marginal cost (MC) equals marginal revenue (MR), it indicates that the cost of producing one more unit of output is exactly balanced by the revenue generated from selling that unit. Producing additional units beyond this point would result in the cost of production exceeding the revenue earned, leading to a reduction in overall profit. Conversely, if a firm produces below this output level, it would not be maximizing potential profit since it could generate more revenue by increasing production. Therefore, aligning MC with MR is crucial for profit maximization. The other provided contexts, while relevant to business operations, do not capture the precise condition under which profit maximization occurs in the short run. Average cost equaling average revenue does not ensure profit maximization because firms can still incur losses in this scenario. Total revenue exceeding total cost is a broader concept that indicates profitability but does not focus specifically on profit maximization. Minimizing fixed costs can help reduce overall expenditures, but it doesn't directly determine the optimal output level for maximization of profits in the short run.