Question

If Pɛd = - 0.8, then in order to increase total profit (TR - TC), a firm should...

(a) increase price, so that TR increases and TC falls.
(b) decrease price, so that TR increases and TC increases.
(c) increase price, so that both TR and TC remain constant.
(d) decrease price, so that TR remains constant and TC falls.
(e) none of the above.

Answer 1

A firm should increase price to increase total revenue and decrease total cost.

Step-by-step explanation:

A firm should increase price, so that total revenue (TR) increases and total cost (TC) falls. According to the information provided, when the market price increases, the firm's marginal revenue (MR) also increases, leading to an increase in production. However, if the marginal cost (MC) exceeds the marginal revenue, the firm will reduce its profits for every additional unit of output produced. Therefore, to maximize profit, the firm should increase price to increase total revenue and decrease total cost.