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In the raspberry farm example, marginal cost exceeds marginal revenue at an output around 90 or 100 packs. According to the source, what should the firm do?
ADouble its selling price right away
BShut the whole firm down right now
CDecrease output, since MC above MR cuts profit
DIncrease output, since MC above MR raises profit
Answer & Solution
Correct answer: C. Decrease output, since MC above MR cuts profit
1. Marginal cost exceeding marginal revenue means the last unit produced cost more than it brought in.
2. Cutting back on that unit saves more in cost than it loses in revenue, raising profit.
3. The firm can increase profit by reducing output in this situation.
4. Increasing output further would only add more unprofitable units, and shutting down entirely goes further than the marginal adjustment called for here.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 8 "Perfect Competition", section 8.2 | How Perfectly Competitive Firms Make Output Decisions_
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