Question

What's wrong with the following statement? Firms should produce as much output as they can sell.

Answer 1

It is wrong to say that firms should produce as much output as they can sell.This is because of the law of diminishing returns to scale.After a certain level of output,diminishing returns sets.It means that after this output,the output does not rise in proportion to a rise in inputs.The level of profit starts to fall for the firms.He can still sell his product in the market but he will have to bear losses.

Therefore,producers should not produce as much as he can sell.Production should take place according to return to scale.