If Marginal revenue exceeds marginal cost, a price-taker firm should
A. expand output
b reduce output
c lower its prices
d. do both a and c
I believe the answer "A" is this correct?
Yes, A. That will increase profit assuming no major new capital investment or overtime expenses are required to increase output. Since "marginal" implies a small change, it is unlikely that capital investment will be changed. Increased hiring may be justified to expand output.
Yes, your answer is correct. When a price-taker firm's marginal revenue exceeds marginal cost, it means that selling an additional unit of output generates more revenue than it costs to produce that unit. In this situation, the firm should expand its output to maximize its profitability.
To arrive at this answer, you need to understand the concept of marginal analysis in economics. Marginal revenue represents the additional revenue a firm earns from selling one more unit of output, while marginal cost represents the additional cost incurred from producing one more unit of output.
In a perfectly competitive market, price-taking firms maximize their profits by producing at a quantity where marginal revenue equals marginal cost. If marginal revenue exceeds marginal cost, it means that producing one more unit of output would add more to the total revenue than the additional cost incurred. By expanding output, the firm can increase its total revenue and maximize its profit.
The other options, reducing output (option B) or lower prices (option C), are not appropriate actions when marginal revenue exceeds marginal cost. Reducing output in this scenario would result in lost sales and lower revenue. Similarly, lowering prices would decrease revenue without necessarily reducing costs, which would negatively impact profitability. Therefore, option D (doing both A and C) is not the correct answer.