Which of the following conditions is true when a firm is maximizing its profits?

• A. Average total cost equals marginal cost (ATC = MC)
• B. Marginal cost equals marginal revenue (MC = MR)
• C. Marginal revenue equals average revenue (MR = AR)
• D. Total revenue equals total cost (TR = TC)

Answer: (B)

Verified step by step guidance

1. Understand the concept of profit maximization: A firm maximizes its profit by producing the quantity of output where the additional cost of producing one more unit (marginal cost, MC) equals the additional revenue gained from selling that unit (marginal revenue, MR).
2. Recall the key condition for profit maximization: Set marginal cost equal to marginal revenue, which can be written as \(\text{MC} = \text{MR}\).
3. Analyze the other options: - \(\text{ATC} = \text{MC}\) is not generally true at profit maximization; MC intersects ATC at its minimum point but this is not the profit-maximizing condition. - \(\text{MR} = \text{AR}\) is true for perfectly competitive firms but does not define profit maximization. - \(\text{TR} = \text{TC}\) means zero economic profit, which is not necessarily the profit-maximizing point.
4. Summarize that the fundamental rule for profit maximization is to produce where \(\text{MC} = \text{MR}\), because producing beyond this point would add more to cost than revenue, reducing profit.
5. Therefore, the correct condition for profit maximization is \(\text{MC} = \text{MR}\).