Question

Is it possible for a firm to make a move that would decrease revenue but increase profit?

1) True
2) False

Answer 1

Yes, it is true that a firm can decrease revenue but increase profit by making strategic decisions that lower costs more than they decrease revenues, such as by reducing output to a more efficient scale or avoiding price wars in oligopolistic markets. The statement is true.

Step-by-step explanation:

It is true that a firm can make a move that would decrease revenue but increase profit. This situation may occur if a firm reduces output to a level where the marginal cost of production is less than the marginal revenue received from each additional unit sold.

By doing so, the firm's overall costs decrease faster than its revenue, leading to an increase in profit, despite the decline in revenue.

For example, consider a monopolistically competitive market where a firm may lower its price to increase demand, but if the lower price leads to operating at a more efficient scale with lower average total costs, the firm might achieve higher profits.

Similarly, in a scenario of a cartel or oligopoly, if one firm unilaterally reduces its output, it may force the market price up (assuming other firms do not adjust their output), hence leading to increased profits if the additional price is higher than the reduced units' marginal cost.

Additionally, a firm could find itself in a situation where competitive dynamics force a change in strategy—like avoiding an all-out price war that could erode profits for all involved (as in the case where firm A and firm B avoid cheating).

Essentially, strategic moves that prioritize profitability over sheer volume of sales can lead to the aforementioned outcome.

Answer 2

Yes, it is possible for a firm to make a move that would decrease revenue but increase profit. This can happen when the firm reduces its production or cuts back on certain expenses, which can lead to lower revenue but also lower costs, resulting in increased profit.

Step-by-step explanation:

Yes, it is possible for a firm to make a move that would decrease revenue but increase profit. This can happen when the firm reduces its production or cuts back on certain expenses, which can lead to lower revenue but also lower costs, resulting in increased profit.

For example, a firm might decide to discontinue a product or service that is not generating enough revenue to cover the costs associated with it. By eliminating this unprofitable product or service, the firm can reduce its expenses and improve its overall profitability, even if it leads to a decrease in revenue.

So, while it may seem counterintuitive, a firm can make strategic decisions that prioritize profit over revenue, ultimately leading to increased profitability.