AP Microeconomics AMSCO Guided Notes
3.5: Profit Maximization
AP Microeconomics Guided Notes
AMSCO 3.5 - Profit Maximization
Essential Questions
- How do firms maximize profit?
I. Profit-Maximizing Rule
1. What is the profit-maximizing rule and what condition must be met for a firm to maximize profit?
2. How do marginal revenue and marginal cost determine whether a firm should increase or decrease production?
A. Understanding Marginal Cost and Marginal Revenue
1. What is marginal cost and how is marginal revenue calculated?
2. Using the jewelry designer example, explain why the designer should stop producing bracelets when marginal cost exceeds marginal revenue.
B. Calculating Economic Profit
1. What is the difference between total revenue and average revenue, and how are they calculated?
2. How can a firm calculate total profit using the average revenue and average total cost approach?
3. Why is it important for firms to balance marginal benefits and marginal costs rather than simply producing as much as possible?
II. Rational Choice Theory
1. What is rational choice theory and how does it apply to firms making profit-maximization decisions?
Key Terms
profit maximization
profit-maximizing rule
rational choice theory
rational economic agents