A business manufacturer has continued producing bicycles until the marginal cost reached $200, at which marginal revenue also reached $200. What would be the effect of producing an addition bicycle? Explain.

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Social Studies

Evans

3 May, 18:26

A business manufacturer has continued producing bicycles until the marginal cost reached $200, at which marginal revenue also reached $200. What would be the effect of producing an addition bicycle? Explain.

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Korbin Hunt · Answer 1

The optimal amount of production for a manufacturing company that seeks to maximize its profit in a perfectly competitive market, is exactly that quantity for which the marginal cost equals the marginal revenue.

By definition, the marginal cost refers to the cost of producing one extra unit, and the marginal revenue would be the revenue collected by selling one extra unit (the price paid by a consumer in the case of a competitive market).

If the firm, which is at the profit maximization situation (marginal cost=marginal revenue = $200), decides to produce one extra unit, the marginal cost will grow over the marginal revenue. This would lead the company to an unoptimal situation, as the firm will be losing money with each additional bycicle, and hence should produce less, until reaching the optimal equality again.