Final answer:
The change in total revenue associated with a one-unit change in output is called marginal revenue. Marginal revenue is compared to marginal cost to determine profitability for additional units produced. The correct answer to the student's question is (b) Marginal revenue.
Step-by-step explanation:
The change in total revenue associated with a one-unit change in output is called marginal revenue. Marginal revenue is a critical concept in economics and business, especially for firms assessing the profitability of increasing their production. We calculate marginal revenue by dividing the change in total revenue by the change in output. A practical way to look at marginal revenue is to think about the additional income a firm receives when it sells one more unit of a good or service. Firms often compare marginal revenue to marginal cost, which is the extra cost of producing one more unit, to determine if it is profitable to produce and sell additional units. The marginal cost is calculated by taking the change in total cost (or variable cost) and dividing it by the change in output. If a firm's marginal revenue exceeds its marginal cost, the additional unit adds to the firm's profit.
Marginal costs typically have a rising trend because of the principle of diminishing marginal returns, which suggests that each additional unit of production will eventually cost more to produce than the previous one. Knowing this relationship helps firms decide on their optimal level of production and pricing strategies.
Therefore, the correct answer to the student's question is (b) Marginal revenue. This concept is essential in understanding how firms make decisions about production and pricing to maximize profits.