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Chapter 21: Problem 6

A firm will operate at that output where \(\mathrm{MC}\) equals MR (LO3) a) only when it is maximizing its profits b) only when it is minimizing its losses c) both when it is maximizing its profits and when it is minimizing its losses d) neither when it is maximizing its profits nor minimizing its losses

Short Answer

Expert verified
A firm will operate at that output level where \(MC = MR\) both when it is maximizing its profits and when it is minimizing its losses. The correct answer is (c).

Step by step solution

01

Understand Marginal Cost (MC) and Marginal Revenue (MR)

In economics, Marginal Cost (MC) refers to the additional cost that a firm incurs to produce one more unit of a good. Marginal Revenue (MR) refers to the additional revenue that the firm receives from selling one more unit of the product.
02

Relationship between MC, MR, and Profit Maximization

A firm maximizes its profits when the difference between its total revenues (TR) and total costs (TC) is the highest. The firm will continue to expand its output as long as the revenue from the additional unit (MR) is greater than the cost (MC) of producing that additional unit. As soon as the MC becomes equal or higher than the MR, the firm will stop expanding its production as there would be no financial gain in doing so. Thus, a firm will maximize its profit when \(MC = MR\).
03

Relationship between MC, MR, and Loss Minimization

In a situation where a firm is experiencing losses, it is still possible for it to minimize losses by producing at a level where \(MC = MR\). It is because producing less might not cover the fixed costs and producing more could increase losses further due to higher variable costs. As a result, minimizing losses is also achievable by setting the MC equal to the MR.
04

Conclusion

Given the analysis and explanation above, we can now deduce the correct answer to the exercise: a) only when it is maximizing its profits **(False)** b) only when it is minimizing its losses **(False)** c) both when it is maximizing its profits and when it is minimizing its losses **(True)** d) neither when it is maximizing its profits nor minimizing its losses **(False)** The correct answer is (c) both when it is maximizing its profits and when it is minimizing its losses. A firm will operate at that output level where \(MC = MR\) under both circumstances.

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Most popular questions from this chapter

Which statement about the perfect competitor is true? (LO4) a) She may charge a little below market price to get more customers. b) She may charge a little above market price to imply that her product is superior. c) She will always charge the market price. d) None of these statements is true.

At an output of \(5, \mathrm{MC}=\$ 49\) and ATC \(=\$ 52\). At an output of \(6, \mathrm{MC}=\$ 59\) and ATC \(=\$ 53\). At the breakeven point, ATC is (LO6) a) above \(\$ 53\) b) \(\$ 53\) c) between \(\$ 52\) and \(\$ 53\) d) \(\$ 52\) e) less than \(\$ 52\)

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