Question

An important application of marginal revenue and marginal cost is that if you're a production manager or business person trying to make a decision on whether to increase output, you should do so if the:

A) Marginal revenue is greater than marginal cost.

B) Marginal revenue is equal to marginal cost.

C) Marginal revenue is less than marginal cost.

D) Marginal revenue is completely unrelated to marginal cost.

Answer 1

To make a decision on increasing output, a production manager should compare marginal revenue with marginal cost and increase output only if marginal revenue is greater than marginal cost.

Step-by-step explanation:

When considering whether to increase output, a production manager or business person should keep a close eye on the relationship between marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, it indicates that each additional unit of output is adding to the total profit, and so it is sensible to increase production.

However, once marginal revenue equals marginal cost, producing more will not increase profits. Furthermore, if marginal revenue is less than marginal cost, continuing to increase production will lead to a decrease in profits. In summary, production should be increased if the marginal revenue is greater than the marginal cost, which corresponds to option A from the choices provided.