A company produces at an output level where marginal cost is equal to marginal revenue and has the following revenue and cost levels:
Total revenue = $1,450
Total cost = $1,500
Total variable cost = $1,300
What would you suggest?
A) shut down
B) continue to produce because the loss is less than the total fixed cost
C) increase production to lower the marginal cost
D) reduce output to lower the marginal cost
E) raise the price

Question

Quizplus · Accepted Answer

The company should continue to produce because the loss is less than the total fixed cost. In this case, the total cost is $1,500 and the total revenue is $1,450, resulting in a loss of $50. However, the total fixed cost is not given and could be higher than $50. Therefore, it is more profitable for the company to continue producing and earning revenue to offset the fixed costs, rather than shutting down and incurring the full amount of fixed costs as a loss.

A Company Produces at an Output Level Where Marginal Cost