Question

You produce until the last unit when Marginal Cost is equal to _________.

A) Average Total Cost
B) Marginal Revenue
C) Average Variable Cost
D) Average Marginal Cost

Answer 1

Marginal Cost is equal to Marginal Revenue at the level of output where the firm maximizes its profits.

Step-by-step explanation:

Marginal Cost is equal to Marginal Revenue at the level of output where the firm maximizes its profits. This is because the firm should continue producing until the additional revenue gained from selling another unit is equal to the additional cost incurred in producing that unit. At this point, the firm is maximizing its profit.

In the short run, the firm also considers whether the market price is greater than the Average Variable Cost (AVC) of producing that output level. If the market price is greater than the AVC, the firm continues to produce, even if it is making economic losses. If the market price is less than the AVC, the firm stops producing and only incurs its fixed costs.

Therefore, the correct answer is B) Marginal Revenue.