Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production to maximize profit
B
Maintain current production level
C
Decrease production to enhance profit
D
Stop production entirely
Understanding the Answer
Let's break down why this is correct
Answer
If the marginal cost of an extra unit is higher than the marginal benefit, the firm should stop producing that unit because it would reduce overall profit. The reasoning is that each additional unit adds more cost than revenue, so adding it hurts the firm’s bottom line. By cutting back production to the point where marginal cost equals marginal benefit, the firm maximizes profit. For example, if producing the 101st unit costs $15 but only brings in $10 of revenue, the firm should not produce it, saving $5 per unit. This keeps the firm’s resources focused on more profitable output.
Detailed Explanation
When the extra cost of making one more unit is higher than the extra benefit it brings, the firm is losing money on that unit. Other options are incorrect because Some think making more always helps; Keeping production the same ignores the new loss.
Key Concepts
Marginal Cost and Marginal Benefit
Optimal Production Level
Allocative Efficiency
Topic
Marginal Analysis
Difficulty
hard level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1A company is evaluating whether to increase production of its product. If the marginal cost of producing one additional unit is $20 and the current market price is $50, what impact would this decision have on producer surplus, assuming the company can sell all additional units produced? Use cost-benefit analysis principles to support your conclusion.
hardEconomics
Practice
2
Question 2If a production company discovers that the marginal cost of producing an additional unit is lower than the selling price, what does this indicate about their current production level?
easyEconomics
Practice
3
Question 3If a company continues to produce goods beyond the point where marginal cost exceeds marginal benefit, what is the likely effect on its overall profitability?
mediumEconomics
Practice
4
Question 4Arrange the steps of conducting marginal analysis to determine optimal output: A) Compare marginal benefit and marginal cost, B) Identify the level of output, C) Make production decisions based on equality of benefits and costs, D) Assess the impact of changes in output on costs and benefits.
easyEconomics
Practice
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.