Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production to maximize profits
B
Maintain the current level of production
C
Decrease production to minimize losses
D
Change the product entirely
Understanding the Answer
Let's break down why this is correct
Answer
When a firm finds that the marginal cost of producing one more unit is greater than the marginal revenue it earns from selling that unit, it will likely decide not to produce that additional unit. This is because producing the unit would lead to a loss, as the cost of making it exceeds the money the firm would make from selling it. For example, if it costs the firm $10 to produce one more item, but it can only sell it for $8, it would lose $2 on that unit. Therefore, the firm aims to maximize its profit by only producing units where the cost is less than or equal to the revenue. By doing this, the firm ensures that it remains profitable and avoids unnecessary losses.
Detailed Explanation
When it costs more to make one more item than what you earn from selling it, the firm loses money. Other options are incorrect because Some might think that making more items will lead to higher profits; Maintaining the same production level might seem safe, but it can lead to losses if costs are higher than earnings.
Key Concepts
marginal cost
production costs
firm behavior.
Topic
Marginal Costs and Total Revenue
Difficulty
hard level question
Cognitive Level
understand
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