Both in the short run and in the long run, a firm maximizes its profits when?
Answer Details
A firm maximizes its profits when its marginal revenue (MR) equals its marginal cost (MC). In other words, the firm should continue producing more output until the additional revenue generated by the last unit produced (MR) is equal to the additional cost incurred in producing that unit (MC). This is true both in the short run and in the long run.
In the short run, a firm may have fixed costs that cannot be changed, such as rent on a factory. Therefore, the firm may be able to cover its fixed costs even if it is not making a profit in the short run. However, in the long run, all costs are variable, and the firm must be able to cover all costs, including the opportunity cost of capital, in order to maximize profits.
The other options listed are important concepts in microeconomics, but they do not directly relate to profit maximization. Average cost (AC) is the total cost per unit of output, while average variable cost (AVC) is the variable cost per unit of output. Marginal cost (MC) is the additional cost incurred in producing one additional unit of output. While these costs are important to consider when making production decisions, they do not necessarily result in profit maximization unless they are compared to marginal revenue (MR).