Assume that Bost Incorporated sells game cartridges that can be used in a popular home video system.The company currently sells 300 cartridges per week and earns $500 in profit.The production manager calculates that the marginal cost of producing the next unit is $5,while marginal revenue from one additional unit is $10.Based on this information we would conclude that:
A)Bost should reduce their output to 295 cartridges to increase profit.
B)Bost's profit would fall to $495 by increasing output by 1 unit.
C)Bost's profit would rise to $505 by increasing output by 1 unit.
D)Bost's profit-maximizing output is 300 cartridges.

Question

Quizplus · Accepted Answer

To maximize profit, a company should produce at the point where marginal revenue equals marginal cost. In this case, the marginal revenue of producing an extra unit is $10, while the marginal cost is only $5. This means that producing an extra cartridge will result in an additional profit of $5 ($10-$5). Therefore, Bost should increase its output by one unit to achieve a profit of $505. Option A is incorrect because reducing output would result in less profit. Option B is incorrect because increasing output by one unit will result in a profit of $505, not $495. Option D is incorrect because producing additional cartridges will result in an increase in profit.

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