Question

A firm that is producing the quantity at which marginal cost exceeds both average total cost and the market price will increase its economic profit by _______.

A. producing a larger quantity
B. raising the price to equal marginal cost
C. producing a smaller quantity
D. producing the quantity that minimizes average total cost

Answer 1

A firm with marginal cost exceeding marginal revenue and market price increases profit by producing a smaller quantity until marginal revenue equals marginal cost. The correct option is C.

Step-by-step explanation:

If a firm is producing a quantity at which marginal cost exceeds both average total cost and the market price, it will increase its economic profit by producing a smaller quantity. This strategy is based on the economic principle that firms maximize profit by producing up to the point where marginal revenue (MR) equals marginal cost (MC).

In the scenario posed, the firm's marginal costs exceed its marginal revenues, indicating that each additional unit produced is actually decreasing the firm's profit. Therefore, the firm should decrease production until MR equals MC to improve profitability.