If the marginal cost of production at Firm 1 is less than the marginal cost of production at Firm 2 but the overall costs of production are lower on average at Firm 2, then:
A) Firm 2 should produce all of the output.
B) Firm 1 should produce all of the output.
C) Firm 1 should produce output up to the point that its marginal costs of production are equal to the marginal costs of Firm 2.
D) Firm 2 should produce additional output up to the point that its average costs are less than its marginal costs.

Question

Quizplus · Accepted Answer

Since Firm 2 has lower overall costs of production, it makes sense for it to produce as much output as possible. However, if Firm 1's marginal cost of production is less than Firm 2's, it can still produce some output at a lower cost. The optimal outcome would be for Firm 1 to produce output up to the point where its marginal cost of production is equal to Firm 2's, and for Firm 2 to produce the remainder of the output. This will result in the lowest overall production costs.

If the Marginal Cost of Production at Firm 1 Is