Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm is producing at a level that maximizes profit.
B
The firm is facing diminishing returns as it increases production.
C
The price set above equilibrium is reducing demand.
D
The firm has incorrectly estimated its cost structure.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm in monopolistic competition 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 makes from selling that unit. This usually happens because the firm is producing too many units and is not maximizing its profit. For example, if the firm is currently making 12 units but finds that the cost to produce the next unit is $10 while it can only sell it for $8, it should reduce production to increase profit. By cutting back on production, the firm can lower its costs and increase its revenue per unit, eventually reaching a point where marginal cost equals marginal revenue. This balance is crucial for the firm to maximize its profits.
Detailed Explanation
When a firm sets its price too high, fewer people want to buy its product. Other options are incorrect because Some might think that producing at this level is good for profit; This option suggests that increasing production leads to lower efficiency.
Key Concepts
Profit Maximization Techniques
Marginal Revenue and Marginal Cost
Monopolistic Competition
Topic
Profit Maximization Techniques
Difficulty
hard level question
Cognitive Level
understand
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