Chapter 9: Problem 10

If a firm is producing a level of output at which that output's marginal cost is less than the price of the good, (LO3) a) it is producing too much to maximize its profits b) it is probably maximizing its profits c) higher profits could be obtained with increased production d) none of the above

Short Answer

Expert verified

Based on the analysis, the correct statement is: c) higher profits could be obtained with increased production This is because the marginal cost of the output is less than the price of the good, which means that producing and selling more units of output would result in more profit for the firm.

Step by step solution

Understanding Marginal Cost, Price, and Profit Maximization

Marginal cost is the increase in total cost that results from producing one more unit of output. Firms try to maximize their profits, which occurs when the difference between revenue and cost is the greatest. As the firm produces more output, the marginal cost may increase or decrease, but eventually, it will increase. The price of a good represents the money received from selling one unit of the output. If the marginal cost of producing a unit is less than its price, the firm gains higher profit from producing and selling that extra unit. Now let's analyze each statement given in the exercise.

Analyzing Statement (a)

If a firm is producing too much to maximize its profits, it would mean that reducing its output level would actually result in higher profits. However, the exercise states that marginal cost is less than the price, which means the firm actually gains more profit from selling extra units of output. So, this statement cannot be correct.

Analyzing Statement (b)

If a firm is probably maximizing its profits, it would mean that by producing this level of output, the firm is maximizing the difference between its revenue and cost. We know that the marginal cost is less than the price, which implies that producing more would actually result in more profit. Hence, this statement cannot be correct either.

Analyzing Statement (c)

If higher profits can be obtained with increased production, it suggests that by increasing its output level and manufacturing more units, the firm can increase its profit. Given that the marginal cost of output is less than the price of the good, producing more would result in more profit. Therefore, this statement seems to be correct.

Analyzing Statement (d)

If none of the above statements were correct, it would mean the relationship between marginal cost, price, and profit maximization cannot be determined based on the given information. However, we identified that statement (c) is indeed consistent with the given information, so this statement cannot be correct.

Choosing the Correct Statement

Based on our analysis, we can conclude that the correct statement is: c) higher profits could be obtained with increased production This is because the marginal cost of the output is less than the price of the good, which means that producing and selling more units of output would result in more profit for the firm.

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