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CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

A firm finds that at its current output, marginal revenue is ₹30 and marginal cost is ₹22. Assuming MC rises with output, what should a profit-maximising firm do?

The firm should expand output. When marginal revenue (₹30) exceeds marginal cost (₹22), each additional unit adds ₹8 to profit. Output should keep rising until the rising marginal cost meets marginal revenue, which is the profit-maximising point.

  1. AReduce output because MR exceeds MC
  2. BExpand output because each extra unit adds more to revenue than to costCorrect
  3. CKeep output unchanged because profit is already maximum
  4. DShut down because MR is greater than zero

Explanation

Since MR (₹30) exceeds MC (₹22), each extra unit adds ₹8 to profit. The firm should expand until rising MC equals MR. Cutting output would forgo this gain, and profit is maximum only when MR = MC.

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