Question

1. Why doesn't maximum output generate maximum profits?
2. If capital investment ceased, what would happen over time to worker productivity and living standards?

Answer 1

1. Maximum profit is generated when the difference between the total revenue and the total costs becomes maximum. The average total cost first falls with an increase in the output and then starts rising again. This happens because of a rise in the marginal cost after a certain level of output. Profit is maximized when the marginal cost becomes equal to the marginal revenue. Beyond this poutput, marginal cost rises and becomes higher than marginal revenue; so, profit is depleted beyond this point. Therefore, maximum output does not generate maximum profit because of cost escalation.