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Question & Answer
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The marginal cost of production has risen above the marginal revenue.
The firm has reduced its labor force, leading to higher marginal products.
The prices of inputs have decreased, leading to lower overall costs.
The demand for the firm's product has increased, raising prices.
Understanding the Answer
Let's break down why this is correct
When the cost of making one more unit (marginal cost) becomes higher than the extra money earned from selling that unit (marginal revenue), the firm loses money on each extra unit. Other options are incorrect because Cutting workers can lower costs but often makes each worker less productive; Lower input prices reduce overall costs, but if the extra cost of each unit still stays above the revenue it makes, profits still fall.
Key Concepts
Profit Maximization
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Deep Dive: Profit Maximization
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Definition
Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.
Topic Definition
Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.
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