Final answer:
The statement is true because diminishing marginal returns lead to higher marginal costs for additional output, causing the marginal-cost curve to slope upward. Firms will aim to maximize profits by producing up to the point where marginal revenue equals marginal cost, adjusting output in response to changes in market price and revenue.
Step-by-step explanation:
The student's statement is true. In the context of production and cost theory in economics, as a firm increases output, it may initially experience increasing returns due to more efficient use of fixed inputs. However, this eventually gives way to diminishing marginal returns where each additional unit of output requires proportionately more input due to factors such as overcrowding, managerial challenges, or equipment limits. Consequently, the marginal-cost curve, which reflects the cost of producing one more unit of output, becomes positively sloped as additional units of output become more expensive to produce.
If marginal costs (MC) exceed marginal revenue (MR), continuing to increase output will indeed lead to a decrease in profit. Instead, the firm would find the profit-maximizing level of production where MR equals MC. If the market price (and thus MR) increases, firms have an incentive to produce more until the MC equals the new MR. When the MC is greater than the MR, firms will reduce output to maximize profits, thereby shifting their individual supply curve to the left.