In a resource allocation problem, if the marginal cost of production exceeds the marginal benefit, what should a firm do? (2023)
Practice Questions
1 question
Q1
In a resource allocation problem, if the marginal cost of production exceeds the marginal benefit, what should a firm do? (2023)
Increase production to maximize profits.
Reduce production to avoid losses.
Maintain current production levels.
Diversify into new markets.
If marginal cost exceeds marginal benefit, the firm should reduce production to avoid losses, making option 1 the correct answer.
Questions & Step-by-step Solutions
1 item
Q
Q: In a resource allocation problem, if the marginal cost of production exceeds the marginal benefit, what should a firm do? (2023)
Solution: If marginal cost exceeds marginal benefit, the firm should reduce production to avoid losses, making option 1 the correct answer.
Steps: 5
Step 1: Understand what marginal cost means. It is the cost of producing one more unit of a product.
Step 2: Understand what marginal benefit means. It is the additional benefit or revenue gained from selling one more unit of a product.
Step 3: Compare the marginal cost and marginal benefit. If the marginal cost is higher than the marginal benefit, it means producing more units is not profitable.
Step 4: Decide to reduce production. Since producing more units leads to losses, the firm should cut back on production.
Step 5: Monitor the production levels to ensure that the marginal cost is lower than or equal to the marginal benefit in the future.
