If a firm is producing at an output level such that the MR is $550 and the MC is $780,
A) the firm incurs a total loss of $230
B) the firm should contract production because marginal profit is less than zero
C) Mπ is +$230
D) the firm should expand its output level because its total revenue is rising by $550

Question

Quizplus · Accepted Answer

In order to maximize profit, a firm should produce where MR=MC. In this case, MR ($550) is less than MC ($780), indicating that the marginal cost of producing an additional unit exceeds the marginal revenue that unit would generate. This means that the firm is incurring a loss on each unit produced. Therefore, the firm should reduce its production to a level where MR=MC, or even shut down in the short run in order to minimize its losses. Hence, choice B is the correct answer.

If a Firm Is Producing at an Output Level Such