Skip to content

IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Which statement best describes the neoclassical idea of marginalism as applied to a firm's output decision?

Under marginalism a firm expands output while the extra revenue from one more unit exceeds the extra cost of producing it. It stops where marginal revenue equals marginal cost, because beyond that point each further unit would reduce profit.

  1. AThe firm should produce until average cost equals average revenue in every case
  2. BThe firm should expand output as long as the extra revenue from one more unit exceeds the extra cost of producing itCorrect
  3. CThe firm should set output so that total revenue is as large as possible regardless of cost
  4. DThe firm should fix price at a mark-up over historic accounting cost
  5. The firm should stop producing once marginal cost begins to rise

Explanation

Marginalism says decisions are made by comparing the additional benefit with the additional cost of one more unit. A firm therefore keeps expanding while marginal revenue exceeds marginal cost. Maximising total revenue ignores cost, and rising marginal cost alone does not justify stopping because revenue may still exceed it.

Did you get it right without looking?

One question tells you little. A timed set on Main economic schools and their key features shows your real accuracy, how long you take and where you lose marks.

Practise Main economic schools and their key featuresFree diagnostic mock

More Main economic schools and their key features questions