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19 January, 00:01

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue

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  1. 19 January, 03:35
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    If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

    a. average revenue exceeds marginal cost.

    b. the firm is earning a positive profit.

    c. decreasing output would increase the firm's profit.

    d. All of the above are correct.

    Answer:

    c. decreasing output would increase the firm's profit.

    Explanation:

    The output of Profit maximization is determined is when the marginal revenue of firm equals its marginal cost.

    An increment in the output will decrease the firm's profit and vice versa.

    Having said this, it should be understood that, when price is equal to the marginal revenue, the profit of the firm is maximized where marginal cost is equal to the price.

    So, when margin cost MC > marginal revenue (MR) then it means there's decrements in output and

    it does not necessarily mean the firm will have a loss but there will definitely be an increase to the firm's profit.
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