Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Profit will increase due to higher sales volume
B
Profit will decrease as production becomes inefficient
C
Profit will remain unchanged at optimal output
D
Profit will fluctuate randomly without a clear trend
Understanding the Answer
Let's break down why this is correct
Answer
If a company keeps producing after marginal cost exceeds marginal benefit, each extra unit costs more than the revenue it generates, so that unit actually reduces profit. As a result, the company’s overall profitability falls because the negative contribution from those units outweighs any gains. Over time, the cumulative losses from over‑production erode the firm’s bottom line. For example, if a product sells for $10 but the marginal cost of the next unit is $12, producing that unit loses $2, dragging down total profit.
Detailed Explanation
When the cost of making one more unit is higher than the money earned from it, the extra cost is not matched by extra income. Other options are incorrect because This answer assumes higher sales always help profits; The idea here is that profit stays the same, but when extra units are unprofitable, profit falls.
Key Concepts
Marginal Analysis
Profit Maximization
Allocative Efficiency
Topic
Marginal Analysis
Difficulty
medium 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 3A firm is deciding on the optimal level of production. If the firm's marginal cost of producing one more unit exceeds the marginal benefit, what should the firm do?
hardEconomics
Practice
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