Homework Sourseprofnt and is operating at t marginal cost by the greatest a
Solution
Marginal cost is the net addition in the total cost of production by producing an additional unit of a good. Marginal Revenue, on the other hand, is the net addition in the total revenue earned by the firm by selling an additional unit of output. According to the profit-maximisation rule using MR-MC approach, a firm will earn the maximum profit at that level of output where Marginal Revenue equals Marginal Cost, that is, MR=MC. If marginal revenue exceeds marginal cost of output, it means that the output is not at its profit maximisation level. Then, more output needs to be produced so that marginal revenue comes down to the level of marginal cost. Thus, even if the firm is earning profits and operating at the output level where MR>MC by the greatest amount, it is still not at the profit-maximizing level of output. The profit-maximizing level of output can be attained by increasing production. Thus,
Option A: the firm is maximizing profit at that output level, is incorrect.
Option C: could increase its profit by decreasing its output level, is incorrect.
Option D: the firm is operating at the output level where total revenue equals total cost, is incorrect. Total revenue is the total amount earned by the firm by selling all the units of the output and Total cost refers to the total expense incurred in the production. TR=TC means that the firm is unable to make any profits, that is, it is making zero profits at this output level. Thus, this is clearly not the profit-maximizing level of output.
Option E: None of the above options is correct, is incorrect.
Hence, Option B: the firm could increase its profit by increasing its output level, is the correct option.
