Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production to maximize profit
B
Decrease production to avoid losses
C
Maintain current production levels
D
Increase prices to enhance revenue
Understanding the Answer
Let's break down why this is correct
Answer
When a firm increases its production but discovers that the marginal costs are higher than the marginal revenue, it means that the cost of producing one more unit is greater than the money earned from selling that unit. In this situation, the firm should consider reducing its production to avoid losing money on each additional item made. For example, if making one more toy costs $10 but sells for only $8, the firm is losing $2 for that toy. By cutting back on production, the firm can focus on making only what is profitable, which helps maintain overall financial health. This approach allows the firm to maximize its profits and minimize losses.
Detailed Explanation
When a company makes more products, it costs more to make each extra item. Other options are incorrect because Some might think making more products will always help profits; Keeping the same amount might seem safe, but if costs are too high, the company will still lose money.
Key Concepts
Marginal Costs
Total Revenue
Profit Maximization
Topic
Marginal Costs and Total Revenue
Difficulty
easy level question
Cognitive Level
understand
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