Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm is likely to lower its prices to increase total revenue.
B
The firm will increase prices to cover higher production costs.
C
The firm will maintain its prices since costs have no impact on pricing.
D
The firm will raise prices to maximize profit despite lower costs.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm experiences a decrease in marginal costs, it means that the cost of producing each additional unit of a product is lower than before. In a competitive market, firms aim to maximize their profits, so a decrease in costs allows them to lower their prices while still maintaining profitability. For example, if a company that makes shoes finds that it costs less to produce each pair, it can reduce its selling price to attract more customers while still covering its costs. This can lead to an increase in total revenue because more people may buy the shoes at the lower price. Overall, the firm will likely adjust its pricing strategy to take advantage of the lower costs and enhance its competitiveness in the market.
Detailed Explanation
When a firm has lower marginal costs, it can produce goods more cheaply. Other options are incorrect because This option suggests raising prices to cover costs; This choice says costs don't affect prices.
Key Concepts
Marginal Costs
Total Revenue
Pricing Strategy
Topic
Marginal Costs and Total Revenue
Difficulty
medium level question
Cognitive Level
understand
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