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Chapter 8: Q5 (page 211)

Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.

Short Answer

Expert verified

Producing when Marginal Cost > Marginal Revenue implies additional profit is 0, ans Total profit decreases.

Step by step solution

01

Definitions 

Marginal Cost is the additional cost when an additional unit of quantity is produced

Marginal Revenue is the additional revenue when an additional unit of quantity is sold.

02

Profit Maximisation Concept

When MC > MR : Additional cost from a unit commodity is higher than additional revenue from a unit commodity.

Additional Profit is difference between additional revenue and additional cost. MC > MR leads to additional profit from sale being negative.

03

Producer Decision Explanation 

A rational profit maximising producer would not like to produce in case of : negative additional profit and decreasing total profit.

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Most popular questions from this chapter

Would independent trucking fit the characteristics of a perfectly competitive industry?

How does a perfectly competitive firm decide what price to charge?

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?

How does a perfectly competitive firm calculate total revenue?

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.
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