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Derive the first-order conditions for a profit-maximizing firm and interpret the results when the firm has...

Derive the first-order conditions for a profit-maximizing firm and interpret the results when the firm has a total expenditure constraint.

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Answer #1

The first order or the necessary condition for profit maximisation is:

That is, if the firm is to obtain maximum profit, it would have to equate its MR and MC, or, it would have to remain at the point of intersection between its MR and MC curves.

  • An assumption in classical economics is that firms seek to maximise profits.
  • Profit = Total Revenue (TR) – Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.
  • A firm can maximise profits if it produces at an output where marginal revenue (MR) = marginal cost (MC)

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