Following a significant decrease in the price of a variable input,at the initial output level:
A)marginal revenue is higher than average revenue.
B)marginal cost is higher than marginal revenue.
C)marginal cost is lower than average revenue.
D)marginal cost is still equal to marginal revenue.

Question

Quizplus · Accepted Answer

When the price of a variable input decreases, the marginal cost of production decreases as well. At the initial output level, if the marginal cost is lower than the average revenue, then the firm can produce additional units of output at a lower cost than the revenue generated from the additional units. This indicates that the firm should increase production to maximize profits. Therefore, option C is the best choice. Options A and B are incorrect because there is no information provided regarding the relationship between marginal revenue and average revenue. Option D is incorrect because the decrease in input cost can lead to a decrease in marginal cost, and hence, marginal revenue can be higher or lower than marginal cost.

Following a Significant Decrease in the Price of a Variable