Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm will maximize profit by producing up to the point where marginal cost equals marginal revenue.
B
The firm should shut down if total revenue is less than total fixed costs.
C
The firm should increase output as long as marginal costs are higher than marginal revenue.
D
The firm maximizes profit by minimizing variable costs regardless of revenue.
Understanding the Answer
Let's break down why this is correct
Answer
In short-run production decisions, a firm needs to consider whether making and selling one more unit of a product is worth the cost involved. This means that if the money the firm earns from selling that extra unit, called marginal revenue, is greater than the extra costs of producing it, known as marginal costs, then it should continue production. For example, if a company produces handmade toys and it costs $5 to make one more toy, but it can sell that toy for $8, the additional revenue exceeds the additional cost. In this case, the firm benefits by $3 for each additional toy sold, making it a good choice to keep producing. Therefore, as long as the extra income is more than the extra expenses, the firm should keep making more products.
Detailed Explanation
A firm should keep making products until the money it makes from selling one more unit equals the cost of making that unit. Other options are incorrect because This statement suggests a firm should stop if it doesn't make enough money to cover fixed costs; This option says to produce more when costs are higher than revenue.
Key Concepts
Variable costs
Profit maximization
Cost-benefit analysis
Topic
Short-Run Production Decisions
Difficulty
hard level question
Cognitive Level
understand
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