Which method do companies typically use to determine the most profitable way to operate?

• A. By producing at the point where total revenue equals total cost
• B. By maximizing total cost regardless of revenue
• C. By minimizing average fixed cost
• D. By comparing marginal cost and marginal revenue to find the output level where marginal revenue equals marginal cost

Answer: (D)

Verified step by step guidance

1. Understand that companies aim to maximize profit, which is the difference between total revenue and total cost.
2. Recall that profit maximization occurs where the additional revenue from selling one more unit (marginal revenue, MR) equals the additional cost of producing that unit (marginal cost, MC).
3. Set up the condition for profit maximization: \(\text{MR} = \text{MC}\).
4. Analyze how producing beyond this point would cause marginal cost to exceed marginal revenue, reducing profit, and producing less would mean missing out on profitable sales.
5. Conclude that companies typically determine the most profitable output by comparing marginal revenue and marginal cost and choosing the output level where they are equal.