Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase output to reach equilibrium
B
Decrease output to reduce costs
C
Maintain current output level
D
Increase prices to boost revenue
Understanding the Answer
Let's break down why this is correct
Answer
When a firm finds that its marginal cost is greater than its marginal revenue, it means that the cost of producing one more unit is higher than the money it would earn from selling that unit. In this situation, the firm is not maximizing its profit because it is losing money on each additional unit produced. To maximize profit, the firm should reduce its production level until marginal cost equals marginal revenue. For example, if a toy company makes 100 toys and finds that making the 101st toy costs more than what it can sell it for, it should stop making that extra toy. By cutting back on production, the firm can focus on making only the number of toys that brings in more money than it costs to make them.
Detailed Explanation
When the cost to produce one more item is higher than the money made from selling it, the firm loses money. Other options are incorrect because Some might think that making more items will help reach a balance; Keeping the same level of production might seem safe.
Key Concepts
Profit Maximization
Marginal Cost and Revenue
Market Equilibrium
Topic
Profit Maximization for Firms
Difficulty
medium level question
Cognitive Level
understand
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