Final answer:
To maximize profits when facing production constraints, a firm should produce products with the highest contribution margin per unit of constrained resource. Production should also be adjusted so that marginal costs do not exceed marginal revenue. These considerations lead to the most efficient use of resources for profitability. Option B is correct.
Step-by-step explanation:
If some products must be cut back because of a constraint, you should produce the products with the highest contribution margin per unit of constrained resource. This is because the contribution margin represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs and profit. When resources are limited, maximizing the contribution margin per unit of the constrained resource helps to maximize profits.
It's essential to recognize that when marginal costs exceed marginal revenue (MR), each additional unit produced increases costs more than revenue, leading to decreased profits. To maximize profitability, a firm should reduce output until MR equals MC (marginal cost), as producing beyond this point would lead to a reduction in overall profit.
Moreover, understanding the stages of production and the marginal product can help businesses determine the optimal input mix to achieve efficient production and high-profit levels. The 'budget constraint' also comes into play when considering production levels within financial limitations.