A firm is spending the profit-maximizing amount on product development when
A) people perceive the firm's product to be better than those of its competitors.
B) the marginal cost of product development is equal to the marginal revenue from product development.
C) the price of the good is higher than its marginal cost.
D) the advertising costs are covered.
E) the firm's total revenue exceeds its total costs.

Question

Quizplus · Accepted Answer

The profit-maximizing amount spent on product development occurs when the marginal cost of product development is equal to the marginal revenue from product development. This is because spending more on product development would increase the marginal cost more than the marginal revenue, reducing profits. Conversely, spending less on product development would increase profits in the short run, but the lack of product development would reduce the firm's competitiveness in the long run, and result in lower profits in the future.

A Firm Is Spending the Profit-Maximizing Amount on Product Development