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As a manager of the firm, you calculate that the marginal revenue is R200 and the marginal cost is R1500
As a manager of the firm, you calculate that the marginal revenue is R200 and the marginal cost is R1500. You should:
a) decrease output.
b) do nothing since you don't have information about average fixed costs.
c) reduce output to where marginal revenue is equal to marginal costs.
d) increase output to where marginal revenue is equal to marginal costs.
e) maintain the current output unchanged.
Expert Solution
c. reduce output to where marginal revenue is equal to marginal costs
Reason: The firm tends to maximise its level of profit at the level where its marginal revenue equals the marginal cost. Here, we see that the marginal cost of the firm is greater than its marginal revenue. If the firm continues to operate at this level, then it would lead to losses for the firms. That is why, the firm needs to reduce its level of output to the point where the marginal revenue becomes equal to the marginal cost of the firm.
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