At the level of output where marginal revenue equals marginal cost, price is les
ID: 1225985 • Letter: A
Question
At the level of output where marginal revenue equals marginal cost, price is less than average total cost but greater than average variable cost. In this instance, a profit-maximizing firm should:
cease production as it is incurring an economic loss.
decrease output to where marginal revenue exceeds marginal cost by the greatest dollar amount.
continue operating at that output level in the short term, since total revenue will cover all of the firm's fixed costs and a portion of its variable costs.
continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs.
a.cease production as it is incurring an economic loss.
b.decrease output to where marginal revenue exceeds marginal cost by the greatest dollar amount.
c.continue operating at that output level in the short term, since total revenue will cover all of the firm's fixed costs and a portion of its variable costs.
d.continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs.
Explanation / Answer
At the level of output where marginal revenue equals marginal cost, price is less than average total cost but greater than average variable cost. In this instance, a profit-maximizing firm should:
continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs.
This is because in that situation firm only earns the variable cost of production, so it will continue its production. Otherwise if he chhoses to shut down its production then he will face more loss than in the current situation. Because in the present situation it still earns variable cost but if it shut the production then he will not earn the variable cost, so he will loss more. So he will continue to produce untill it recovers the variable cost and some of its fixed cost.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.