Question

If a profit-maximizing firm finds that, at its current level of production, marginal revenue is greater than marginal cost, it will

a.	earn greater profits than at a level where marginal revenue equals marginal cost.
b.	shut down.
c.	decrease output.
d.	increase output.

Answer 1

Answer:

Option D - Increase Output is the right option.

Reason:

In order to make maximum profit, the firm must work in a place where the marginal revenue is equal to the marginal price. When the marginal revenue is higher than the marginal cost, the company has room to make more profit and therefore, its production should increase to the point where the retail revenue is equal to the marginal cost. When the Marginal revenue is less than the marginal cost, the firm should reduce its production because at this level, the cost of creating additional units is higher than the revenue generated from the sale of the same unit.

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