Question

If a firm is producing an output level for which marginal revenue is less than marginal cost;

a. the firm can increase profits by producing and selling more output
b. the firm can increase profits by producing and selling less output
c. the firm is maximizing profits
d. whether or not the firm is maximizing profits cannot be determined

Answer 1

The correct answer is option b.

Step-by-step explanation:

A firm is able to maximize it's profit by producing output at the level where the marginal revenue earned from the last unit of output is equal to marginal cost incurred on it.

If a firm is operating at the point where the marginal revenue is lower than the marginal cost then the firm can maximize profit by reducing its output till the point where the marginal revenue and marginal cost are equal.