Association of Chartered Certified Accountants (ACCA) Certification Practice Test

To maximize profits in the short run, at what point should a firm supply?

1. When total cost equals total revenue

2. At the point where marginal cost (MC) is less than marginal revenue (MR)

3. At the point where marginal cost (MC) = marginal revenue (MR)

4. When average cost (AC) is minimized

The correct answer is: At the point where marginal cost (MC) = marginal revenue (MR)

A firm should supply at the point where marginal cost (MC) equals marginal revenue (MR) to maximize profits in the short run. This concept is fundamental in microeconomics and reflects the optimal condition for profit maximization. When a firm produces output, it faces a decision on how much to produce based on the costs of production and the revenue generated by selling the product. Marginal cost represents the additional cost of producing one more unit of output, while marginal revenue is the additional revenue received from selling that extra unit. At the point where MC equals MR, the firm has reached an optimal production level. If the firm were to produce less than this point (where MC is less than MR), it could increase profits by increasing output because the revenue generated by additional units exceeds the costs incurred. Conversely, if it produces beyond this point (where MC is greater than MR), the firm would incur losses on each additional unit produced because the cost would exceed the revenue received. This balance ensures that the firm maximizes its profits by avoiding production levels that would lead to unnecessary losses or unutilized potential in profit generation.