Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By comparing marginal cost to average total cost
B
By ensuring that marginal product equals marginal cost
C
By analyzing fixed costs in relation to variable costs
D
By maximizing average revenue
Understanding the Answer
Let's break down why this is correct
Answer
A firm can determine if it is operating at production efficiency by looking at the relationship between the extra output it gains from producing one more unit and the extra cost of making that unit. This is called marginal analysis, where the firm compares the marginal cost of production to the marginal revenue it earns from selling that extra unit. If the marginal revenue is greater than or equal to the marginal cost, the firm is producing efficiently, as it means they are maximizing their profits. For example, if a company finds that making one more toy costs $5 but sells for $7, it shows that producing that toy is efficient. However, if the cost were $8, the firm would be losing money on that extra toy, indicating it needs to adjust its production levels.
Detailed Explanation
A firm is efficient when the extra output from one more unit of input matches the cost of that input. Other options are incorrect because Some might think comparing marginal cost to average total cost shows efficiency; Focusing on fixed and variable costs can be misleading.
Key Concepts
production efficiency
economic efficiency
Topic
Marginal Analysis
Difficulty
medium level question
Cognitive Level
understand
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