A fiRm Is Producing an Output of 500 Units

question 46

Multiple Choice

A firm is producing an output of 500 units. The revenue from an additional unit sold is £6, while the marginal cost of producing each unit is £5. In order to maximize profits, the firm should:

• A) reduce the number of units produced.
• B) continue to produce the same number of units.
• C) increase output beyond 500 units.
• D) reduce its variable costs.

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Definitions:

Optimal Capital/Labor Ratio

The most efficient mix of capital and labor that maximizes output or minimizes cost for producing a given level of output.

Production Function

An equation that describes the maximum output of a firm, given the quantity of inputs.

Variable Cost Function

A mathematical representation of the costs that vary with the level of output or activity, unlike fixed costs.

Marginal Cost Curve

A graphical representation that shows how the cost of producing one more unit of something changes as the quantity produced increases.