Profit Maximization under Imperfect Competition

Hi everyone,

so this question is confusing me a bit:

Under imperfect competition, maximium profit is best described as occurring at the output level at which:

1) the difference between total revenue and total costs is greatest.

2) marginal revenue equals marginal cost

3) total revenue equals total cost.


Maximum Profit occurs at the output level at which the difference between total revenue and total costs is greates.

It was my understanding that in all markets profits are maximized when MC=MR, and depending on pricing power, then the price may or may not be equal to MC. So why is 2) not correct?

Profit maximization _ always _ occurs when MR = MC.

The question’s stupid.

Agreed, thank you S2000 for clarifying!! I wrote them an e-mail to let them know.

If I am not wrong, profit maximisation doesn’t always occur when MR=MC. MR=MC is just the first order condition and may signify a maxima or a minima. Dont you need to also check the second order condition?

So, the appropriate answer should be when the difference between revenue and cost (i.e. profit) is maximum

If this were a problem in a calculus class, then I’d agree that you need to check the convexity.

But this is a question in the economics section of a CFA exam. As a practical matter, you’re going to get a downward sloping marginal revenue curve and an upward sloping marginal cost curve. Where they cross you’ll have maximum profit, not minimum.

Also note that maxima and minima are plurals; you probably meant a maxim_ um _ or minim_ um _.