Question

The CEO of a major automaker overheard one of its division managers make the following statement regarding the firm's production plans: "To maximize profits, it is essential that we operate at the minimum point of our average total cost curve." If you were the CEO of the automaker, would you praise or chastise the manager? Explain.

Short answer

Criticize the management. To maximize profits, produce when MR = MC.

Step-by-step solution

Introduction

When companies have significant market power, the short-run earnings are maximized when the marginal revenue equals your marginal expense. This, in turn, may not be a bit of suitable long-term advice; for example, if it prices the division's goods out of the segment of the market, re-design, as well as the resulting change in expense function, maybe the appropriate answer.

Explanation

As a result, the CEO must chastise the management. To maximize profit, it is necessary to produce where MR = MC. A corporation must function at the point where marginal revenue equals marginal cost for a firm's revenue to surpass its expenses and for the company to run properly in both the short as well as long run. This means that a company's output levels will not be determined arbitrarily. It should select an out level that matches its maximizing profit goals, where MR = MC.