Question

What is the relationship between Marginal Revenue (MR), Marginal Cost (MC), and a firm's decision regarding production?

a) If MR > MC, the firm should increase production
b) If MC > MR, the firm should increase production
c) If MR < MC, the firm should decrease production
d) If MC < MR, the firm should decrease production

Answer 1

The relationship between Marginal Revenue (MR), Marginal Cost (MC), and a firm's decision regarding production depend on whether MR exceeds MC or MC exceeds MR.

Step-by-step explanation:

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production, because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC.

If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of output until MR = MC.