Question

Suppose that a firm in a perfectly competitive industry finds that at its current output rate, marginal revenue exceeds the minimum average total cost of producing any feasible rate of output. Furthermore, Marginal revenue (MR)is that the increase in revenue that results from the saleof 1 additional unit of output. While marginal revenue can remain constant overa specific level of output, it follows from the law of diminishing returnsand can eventuallyblock because the output level increases. Intheory, perfectly competitive firms continue producing output until marginal revenue equalsincremental cost.
Is the firm maximizing its economic profits? Why or why not?

Short answer

• The cost must be proportionate to the marginal revenue in order to maximize profit.
• As a result, the company's output rate should be increased.

Step-by-step solution

Introduction

• The increase in income that results from the sale of an extra unit is referred to as the sales cost (MR).
• While marginal income can remain constant for a limited amount of production, as output levels climb, the law of diminishing returns mandates that it will eventually plateau. In theory, perfectly competitive businesses will keep producing until marginal income equals incremental costs.

Given Information

The firm is producing an output rate at whichmonetary value is a smaller amount thanthe typical total cost at that rate of output.

Explanation

• If the incremental cost is a smaller amount than the common total cost, then it indicates that the cost curve is belowthe common cost curve.
  It means the price is a smaller amount than the marginal revenue. Thus, the firm isn't maximizing the profit.
• In the perfectly competitive industry, to maximize the profit, cost should be adequate the marginal revenue.
• Thus, the firm should increase the speed of output