Question

The market price for wallets is $20. Your technology is such that at your most efficient production point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and shouts, "Boss!!! Average costs are rising!! Average costs are rising!!" To make a profit-maximizing decision, you should:

1. immediately stop production

2. completely ignore your manager

3. ask the manager about the marginal cost

4. ask the manager about the average total cost

Answer 1

3. ask the manager about the marginal cost

Step-by-step explanation:

When the manager said that the average costs are rising, he means that per unit cost of a product is rising. Whereas Marginal cost is the cost that is added by producing one additional unit. So, the Boss should ask the manager about marginal cost. Under the, profit-maximizing decision, the Marginal Cost is equal to Marginal Revenue.