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 exceeds average variable cost, the firm is covering its variable costs and some of its fixed costs. Therefore, it should continue producing in the short run rather than shutting down. However, if marginal cost is greater than marginal revenue, the firm is not maximizing its profits. To increase profits, the firm should reduce output to the point where marginal revenue equals marginal cost. This means the firm will produce as long as price exceeds marginal cost. Therefore, reducing output but continuing to produce is the best option.

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