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Chapter 9: Problem 4

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

Short Answer

Expert verified
A profit-maximizing firm will increase production when the price exceeds marginal cost (Option d).

Step by step solution

01

Option a) Price is less than marginal cost

In this case, the firm is losing money on every additional unit produced since the cost of producing each unit is greater than the price the firm can sell it for. Therefore, a profit-maximizing firm will not increase production under this condition.
02

Option b) Price equals marginal cost

When the price equals the marginal cost, the firm breaks even on each additional unit produced. Although the firm is not losing money, it is also not maximizing its profit as it is not making any profit on the additional units. So, a profit-maximizing firm will not increase its production when price equals marginal cost.
03

Option c) Price exceeds marginal revenue

This scenario compares price with marginal revenue. It doesn't discuss the relation between marginal cost and price or marginal revenue. When price exceeds marginal revenue, it is not a sufficient condition to determine whether the firm will increase production as we need to consider the relationship between price (or marginal revenue) and marginal cost for decision making. Hence, we cannot say whether a profit-maximizing firm will increase production.
04

Option d) Price exceeds marginal cost

In this case, the price the firm can sell its products for is greater than the cost of producing each additional unit. This means that the firm makes a profit on each additional unit produced. So, a profit-maximizing firm is incentivized to increase production under this condition, as they can make more profit by producing more units. The correct choice is: d) A profit-maximizing firm will increase production when the price exceeds marginal cost.

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Most popular questions from this chapter

Under perfect competition, there are (LO4) a) many firms producing an identical product b) a few firms producing an identical product c) many firms producing a differentiated product d) a few firms producing a differentiated product

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