Final answer:
To maximize contribution to profit in component units, determine the output level where marginal revenue equals marginal cost. If MR is greater than MC, expand production up to this level; if MR is less than MC, reduce production until they are equal.
Step-by-step explanation:
To solve for the recommended production quantities that maximize contribution to profit in component units, you need to determine the output level where marginal revenue (MR) equals marginal cost (MC). This is because at this point, each additional unit produced will generate additional revenue equal to its cost, maximizing profit. If MR is greater than MC, the firm should expand production up to the point where MR equals MC. If MR is less than MC, the firm should reduce production until MR equals MC.For example, if we have a firm producing a product and we find that at an output level of 50 units, MR is equal to $200 and MC is equal to $150, the firm should continue producing up to 50 units to maximize the contribution to profit. Beyond this point, the cost of producing each additional unit would exceed the additional revenue generated, resulting in a decrease in profit.