If marginal revenue exceeds marginal cost at the current level of output, profit will increase when output is expanded because
A) other firms in the industry will shut down as the firm expands output.
B) the market price will rise as the firm expands output.
C) producing and selling an additional unit will add more to total revenue than it adds to total cost.
D) marginal cost will decline as output is expanded.

Question

Quizplus · Accepted Answer

If marginal revenue exceeds marginal cost, it means that the firm is gaining more revenue from each additional unit produced than the cost incurred in producing it. Expanding output would mean producing and selling more units, which would add even more to total revenue than it adds to total cost. This would increase profits for the firm. Option A is incorrect because the behavior of other firms in the industry is not relevant to the profit of the firm. Option B is wrong because the market price is assumed to be constant. Option D is incorrect because marginal cost may or may not decline as output is expanded depending on the nature of the production technology.

If Marginal Revenue Exceeds Marginal Cost at the Current Level