Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production as long as the marginal revenue exceeds the marginal cost.
B
Always increase production regardless of marginal costs.
C
Decrease production if the marginal cost is higher than the total revenue.
D
Maintain current production levels if the total cost is lower than the average revenue.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm is thinking about increasing production, it should focus on marginal analysis, which looks at the additional benefits and costs of producing one more unit. The key idea is to compare marginal revenue, the money earned from selling one more unit, with marginal cost, the cost of producing that extra unit. If the marginal revenue is greater than the marginal cost, it makes sense for the firm to increase production because it will earn more money than it spends. For example, if making one more gadget costs $10 but sells for $15, the firm gains $5, indicating that increasing production is a good choice. However, if the costs exceed the revenue, the firm should hold back on production to avoid losses.
Detailed Explanation
A firm should increase production when the extra money made from selling one more item (marginal revenue) is greater than the extra cost to make that item (marginal cost). Other options are incorrect because Thinking a firm should always make more items ignores costs; This option confuses total revenue with marginal cost.
Key Concepts
cost-benefit analysis
marginal revenue
trade-offs.
Topic
Understanding Marginal Analysis
Difficulty
hard level question
Cognitive Level
understand
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