If a profit-maximizing firm finds that price exceeds average variable cost and marginal cost is greater than marginal revenue,it should:

Question

Quizplus · Accepted Answer

If price is greater than average variable cost, the firm is covering its variable costs and is making a contribution towards the fixed costs. In the short run, it is better for the firm to continue with production and cover as much of the fixed costs as possible. However, if marginal cost is greater than marginal revenue, the firm should reduce its output to the point where marginal cost equals marginal revenue to maximize its profits. This means that the firm should continue producing, but at a reduced level.

If a Profit-Maximizing Firm Finds That Price Exceeds Average Variable