If a firm is producing a level of output where marginal revenue exceeds marginal cost, would it improve profits by increasing output, decreasing output, or keeping output unchanged?
To determine whether a firm should increase, decrease, or keep output unchanged when marginal revenue exceeds marginal cost, you need to understand the concept of profit maximization.
Profit maximization occurs when a firm produces the level of output at which marginal revenue (MR) equals marginal cost (MC). This is because MR represents the additional revenue earned from selling one more unit, while MC represents the additional cost incurred to produce one more unit. When MR exceeds MC, it implies that the firm can still generate more revenue from the sale of additional units than it incurs in additional costs.
Now, let's look at the different scenarios:
1. Increasing output: If a firm is currently producing a level of output where MR exceeds MC, it would be beneficial to increase output. By producing and selling additional units, the firm can continue earning more revenue than the additional cost incurred. As long as MR exceeds MC, each additional unit will contribute positively to profits.
2. Decreasing output: If a firm is currently producing a level of output where MR exceeds MC, decreasing output would not be a rational decision. By reducing production, the firm would lose the opportunity to earn additional revenue that exceeds the corresponding decrease in costs. This would ultimately lead to a reduction in profits.
3. Keeping output unchanged: If a firm is already producing a level of output where MR exceeds MC, keeping output unchanged would maintain the profit maximization condition. As long as MR stays above MC, the firm would continue to optimize its profits at the current output level.
In summary, if a firm is producing a level of output where marginal revenue exceeds marginal cost, it would improve profits by increasing output.