Question

1. A firm's output price is $5 and the firm is producing 37 units with a marginal cost of $3. The firm should
   A. lower its price.
   B. decrease production.

   C. increase production. D. raise its price.

Answer 1

Option C.

• The firm should increase its production.
• We know that marginal cost is the cost that a firm incurs for producing one more unit of a good.
• If a firms Marginal cost is less than the price at which it sells its goods, then the firm can increase its production upto a level where the marginal cost equals marginal revenue.
• Here it is given that a firm is able to produce 37 units of goods at a marginal cost of $3 and is selling them at $5. As price is greater than marginal cost it can increase its production level.