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Mike, of Mike's Machines, has hired a consultant who informs Mike that since the total revenue from current operations exceeds the total cost, he should consider increasing the production of machines
Mike, of Mike's Machines, has hired a consultant who informs Mike that since the total revenue from current operations exceeds the total cost, he should consider increasing the production of machines. Mike would be best off if he:
a. Increases the production of machines until total revenue is equal to the total cost,
b. Increases production until net gains is equal to zero,
c. Maintains his current level of production so long as marginal revenue is equal to marginal cost,
d. Decreases his current level of production if marginal revenue is equal to marginal cost.
Expert Solution
The correct option is (c). Maintains his current level of production as long as marginal revenue is equal to marginal costs.
Here, Mike's consultant said that Mike is earning is a positive economic profit as its total revenue exceeds total cost; therefore, it is fruitful to raise the production level as long as at the firm's current level of output both the marginal revenue and the marginal cost are the same.
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