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Chapter 9: Problem 12

A firm will operate at that output at which \(M C=M R\) (LO1, 6) a) only in the short run b) only in the long run c) in both the short run and the long run d) in neither the short run nor the long run

Short Answer

Expert verified
The correct answer is: c) in both the short run and the long run.

Step by step solution

01

Option A: Only in the short run

In the short run, some factors of production are fixed, like capital or machinery. So, firms can only change the variable factors like labor, raw materials, etc. In this situation, firms are just trying to find the best possible way to maximize their profit at the given moment in time. When the Marginal Cost (MC) equals Marginal Revenue (MR), firms maximize their profits, since this is the point where no more revenue can be generated from producing an extra unit of output. Hence, the firm will operate at MC = MR in the short run.
02

Option B: Only in the long run

In the long run, all factors of production can be adjusted, allowing for the entry and exit of new firms in the market depending on the profit potential. Firms will try to reach the optimal scale of production by adjusting their capital and other inputs to maximize profitability. The condition that holds true in the long run is that the long-run average total cost is minimized at the level of output where LRMC (Long Run Marginal Cost) equals LRAC (Long Run Average Cost). However, this does not mean firms operate at MC = MR only in the long run, as they'll still maximize their profits by producing at the output level where MC = MR.
03

Option C: In both the short run and the long run

As discussed in option A and option B, firms always try to maximize their profit by producing at the output level where MC = MR. This condition needs to be satisfied both in the short run and the long run in order to achieve profit maximization. Therefore, the firm will operate at the output where MC = MR in both the short run and the long run.
04

Option D: In neither the short run nor the long run

This option contradicts the fundamentals of profit maximization for firms, as producing at MC = MR is the key condition for maximizing profits. Therefore, it can be confidently said that this option is incorrect. To conclude, the correct answer is
05

Option C: In both the short run and the long run

. The firm will operate at the output level where MC = MR in both scenarios, as this condition ensures profit maximization.

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Most popular questions from this chapter

Statement 1: Price is equal to total revenue divided by output. Statement 2 : A firm never maximizes profits. (LO3) a) Statement 1 is true, and statement 2 is false. b) Statement 2 is true, and statement 1 is false. c) Both statements are true. d) Both statements are false.

Under perfect competition, (LO4) a) many firms have some influence over price b) a few firms have influence over price c) no firm has any influence over price

A profit-maximizing firm will increase production when (LO3) a) price is less than marginal cost b) price equals marginal cost c) price exceeds marginal revenue d) price exceeds marginal cost

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

The perfect competitor's demand and marginal revenue curves are (LO5) a) identical only in the long run b) identical only in the short run c) never identical d) always identical
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