To determine the quantity that a business will produce to maximize its profits, we need to understand some key economic concepts: marginal cost (MC) and marginal revenue (MR).
1. Marginal Cost (MC) is the cost of producing one additional unit of a good.
2. Marginal Revenue (MR) is the additional revenue that a business earns from selling one more unit of a good.
For profit maximization, a firm produces up to the point where the marginal cost of producing an additional unit is exactly equal to the marginal revenue from selling that additional unit. This condition is crucial because:
- If MR > MC, the firm can increase its profit by producing and selling more units.
- If MR < MC, the firm should decrease its production because producing additional units would add more to the cost than to the revenue, thereby reducing overall profit.
Therefore, the optimal production level occurs precisely where marginal cost (MC) equals marginal revenue (MR).
Considering the choices given:
- The highest point on its supply curve: This is not correct because the highest point on the supply curve does not necessarily correspond to the optimal profit level; it relates to maximum quantity supplied at a given price.
- The lowest point on its supply curve: This is also not correct, as the lowest point on the supply curve typically corresponds to the smallest quantity produced, not optimal profit.
- Where marginal cost exceeds marginal revenue: This is incorrect because if MC exceeds MR, the firm should reduce production to maximize profits.
- Where marginal cost meets marginal revenue: This is the correct choice because it satisfies the profit-maximizing condition discussed above.
Thus, the quantity a business will produce to maximize its profits is where marginal cost meets marginal revenue.
The correct answer is:
- O Where marginal cost meets marginal revenue
