Ben and Jerry are managers at the company, and they have this discussion: Ben: W

Question

Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4,000 lamps per month because that will minimize our average costs. Jerry: But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account? Ben: Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity. Evaluate the discussion between the two managers. Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is

A. correct because this level of production occurs on the firm's minimum efficient scale, which is unaffected by consumer demand.

B. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.

C. correct because this is the same quantity that maximizes profits where marginal cost equals marginal revenue since consumer demand does not affect marginal cost or marginal revenue.

D. incorrect because profits are instead maximized at the quantity where priceprice equals marginal revenuemarginal revenue, which may be different since price depends on consumer demand.

E. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since the marginal cost of production is greatergreater than the average cost when average costs are minimized. Click to select your answer.

Explanation / Answer

The correct answer is "B" profits are maximised at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.

Let's review each option separately. It will make things more clear

a) wrong because when the average total cost is the minimum the firm is producing at its maximum efficient scale not minimum as mentioned in the option. Any frim producing in a perfectly competitive market does that.

c) Consumer demand does affect marginal revenue as the demand goes down the marginal revenue also comes down. It does not affect the marginal cost.

d) this is a perfectly competitive market scenario, there a seller tries to match its price and marginal revenue at the point where marginal cost and the lowest point of average cost meets but it doesn't maximise profit but the firm break even.

e) wrong, profit does get maximised at the point where MC= MR. But at a point where marginal cost is more than average cost firm will stop production as they will face loss. To maximise profit a firm will produce at a point where average cost is still falling but not at its lowest.   

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