If a profit-maximizing firm, with an increasing average cost curve, finds that it is producing a level of output at which marginal costs are $100, while marginal revenue is $5, what action should it take?
A)Raise output.
B)Lower prices.
C)Declare bankruptcy.
D)Decrease output.
E)None of the above.

Question

Quizplus · Accepted Answer

If the firm's marginal cost is more than its marginal revenue, then the firm should decrease output to reduce costs and increase profits. When marginal costs exceed marginal revenue, the firm is incurring losses that will eventually lead to bankruptcy. Additionally, since the firm's average cost curve is increasing, it would be beneficial to reduce output in order to reduce average costs per unit. Therefore, the best action for the firm would be to decrease output.

If a Profit-Maximizing Firm, with an Increasing Average Cost Curve