The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the initial marginal cost, MR the initial marginal revenue, and D the initial demand curve of the firm in equilibrium.Further, MC', D', and MR' represents the revised marginal cost, demand, and marginal revenue respectively after the firm adopts the strategy discussed below.

-Refer to Figure .Will the firm invest in the purchase of new machinery which improves the quality of its product?
A)It will not as the demand for the firm's output declines after using the new machine.
B)It will not as the firm's profit margin reduces after using the new machine.
C)It will if the annual cost for this machinery is more than $5.
D)It will if the annual cost for this machinery is less than $7.5.

Question

The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the initial marginal cost, MR the initial marginal revenue, and D the initial demand curve of the firm in equilibrium.Further, MC', D', and MR' represents the revised marginal cost, demand, and marginal revenue respectively after the firm adopts the strategy discussed below.

-Refer to Figure .Will the firm invest in the purchase of new machinery which improves the quality of its product?

-Refer to Figure .Will the firm invest in the purchase of new machinery which improves the quality of its product?
A)It will not as the demand for the firm's output declines after using the new machine. 
B)It will not as the firm's profit margin reduces after using the new machine. 
C)It will if the annual cost for this machinery is more than $5. 
D)It will if the annual cost for this machinery is less than $7.5.

Quizplus · Accepted Answer

The firm should invest in the purchase of new machinery if the annual cost for this machinery is less than $7.5. This is because the revised marginal cost curve (MC') is lower than the initial marginal cost curve (MC) after the firm adopts the new technology. This will lead to an increase in the quantity produced and sold by the firm, resulting in an increase in revenue. Although the demand for the firm's output declines after using the new machine, the increase in revenue due to the lower marginal cost is sufficient to offset this decline. Therefore, the firm can still earn a higher profit margin after using the new machine.

The Figure Given Below Represents a Firm in a Market