Question

[Marginal revenue, marginal cost, and profit: 6 pts] Suppose that United Manufacturing Company has, at its current level of output, an average cost of $2, a marginal cost of $3 and a marginal revenue of $7.

a. If United increases its output by one unit, will its profit increase or decrease?

b. By approximately how much?

Answer 1

Req a: The profit will Increase.

The explanation is as follows:

Marginal cost is the additional cost of producing one more unit of output which is computed as $3

Marginal revenue is the additional revenue generated for selling one more unit of ouutput whch is computed as $7

As marginal revenue is more than the marginal cost, the profits of the ccompany will increase.

Req b: The profit will increase by $ 4.00

The explanation is as follows:

Profit for additional unit sold = Marginal revenue of additional unit sold - Marginal cost of additional unit produced

                                             = $ 7.00 - $ 3.00 = $ 4.00 per unit