Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production until marginal revenue equals marginal cost.
B
Continue producing at the current level since increasing production will not affect profits.
C
Decrease production to lower costs since prices are higher.
D
Raise prices to increase total revenue regardless of marginal cost.
Understanding the Answer
Let's break down why this is correct
Answer
To maximize her profits in the short run, the dairy farmer should focus on increasing her milk production as long as the additional cost of producing more milk is less than the market price she can sell it for. This means she needs to calculate her marginal cost, which is the cost of producing one more gallon of milk. If the market price is higher than her marginal cost, she should produce more because each additional gallon will add to her profits. For example, if it costs her $2 to produce one more gallon of milk and she can sell it for $3, she gains $1 for that gallon. By continuing to produce until her marginal cost equals the market price, she can ensure she is maximizing her profits effectively.
Detailed Explanation
To make the most money, the farmer should keep increasing milk production until the extra money made from selling one more unit (marginal revenue) equals the extra cost of making that unit (marginal cost). Other options are incorrect because Some might think that staying at the same production level is best; The idea here is to cut back on production, but higher prices mean she can earn more.
Key Concepts
Profit Maximization in Perfect Competition
Marginal Revenue and Marginal Cost
Long-Run Equilibrium
Topic
Profit Maximization in Perfect Competition
Difficulty
easy level question
Cognitive Level
understand
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