Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
total cost
B
average revenue
C
marginal revenue
D
fixed cost
Understanding the Answer
Let's break down why this is correct
Answer
In the context of profit maximization, a firm should continue to produce additional units of output as long as the marginal revenue is greater than the marginal cost. Marginal revenue is the extra money earned from selling one more unit of a product, while marginal cost is the extra cost incurred from producing that one additional unit. If the revenue from selling an additional unit exceeds the cost of producing it, the firm can increase its overall profit by making that unit. For example, if a company sells a toy for $10 and it costs them $7 to make, the marginal revenue is $10 and the marginal cost is $7. Since $10 is greater than $7, the firm should produce more toys to maximize its profit.
Detailed Explanation
A firm should keep making more products if the money it earns from selling one more unit is higher than what it costs to make that unit. Other options are incorrect because Some might think total cost matters, but it includes all costs, not just the cost of making one more item; Average revenue is the money made per item sold, but it doesn't show if making more items is profitable.
Key Concepts
Profit Maximization
Marginal Analysis
Market Efficiency
Topic
Profit Maximization for Firms
Difficulty
easy level question
Cognitive Level
understand
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