Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Compare the marginal cost of production to the marginal benefit of selling that unit.
B
Focus solely on the fixed costs incurred during production.
C
Assess the total costs of all units already produced.
D
Ignore opportunity costs as they don't affect production decisions.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm thinks about producing one more unit of a good, it should use marginal analysis to make its decision. This means the firm looks at the additional benefits and costs of making that extra unit. The key idea is to compare the marginal cost, which is the cost of producing one more unit, with the marginal benefit, which is the extra revenue earned from selling that unit. If the marginal benefit is greater than the marginal cost, it makes sense to produce the additional unit, as it will increase the firm's profit. For example, if it costs $5 to produce one more toy, but selling it brings in $10, the firm should go ahead and produce it because it earns an extra $5 in profit.
Detailed Explanation
A firm should look at the extra cost of making one more item and the extra money it can earn from selling it. Other options are incorrect because Focusing only on fixed costs can be misleading; Looking at total costs ignores the benefits of producing one more item.
Key Concepts
Marginal Analysis
Marginal Costs and Benefits
Opportunity Costs
Topic
Marginal Analysis in Economics
Difficulty
medium level question
Cognitive Level
understand
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