Final answer:
To maximize profits, a company should reduce the output of digital music players when marginal costs exceed marginal benefits, aiming to reach the point where marginal revenue equals marginal costs. This is the profit-maximizing level of production.
Step-by-step explanation:
When considering the optimal output of digital music players, or any product, it is paramount to examine the relationship between marginal costs (MC) and marginal benefits (MB), or in more technical terms, marginal revenue (MR). If the marginal costs of producing an additional unit exceeds the marginal benefits (revenue) it generates, the company is essentially losing money on each additional unit produced. Therefore, to maximize profits, the output should be reduced until the point where MR equals MC. In economic theory, this is considered the profit-maximizing level of production.
From the options provided, the correct one supports this principle; it states that the output should be reduced if marginal costs exceed marginal benefits. Producing beyond this point would result in reduced overall profits for the company.
Contrary to the situation where MC exceeds MB, if the firm is currently producing at a quantity where MC is less than MR, the firm can increase profits by producing more units until MR equals MC. This represents the most efficient level of production, where the cost of producing one additional unit exactly equals the revenue it generates, and therefore, no further profit can be gained by either increasing or decreasing the level of output.