When Using Differential Analysis to Determine When to Add or Drop

question 44

Multiple Choice

When using differential analysis to determine when to add or drop parts of operations,if the differential revenue from the sale of a product is less than the differential costs required to provide the product for sale,then

• A)the product generates losses and the firm should discontinue its production.
• B)the product generates losses and the firm should continue its production.
• C)the product generates profits and the firm should discontinue its production.
• D)the product generates profits and the firm should continue its production.

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Definitions:

Labor

Human effort used in the production of goods and services.

Perfect Competition

A market structure characterized by a large number of small firms, identical products sold by all firms, no barriers to enter or exit the market, and perfect knowledge of prices and technology.

Marginal Product

The additional output produced as a result of employing one more unit of a particular input while keeping other inputs constant.

Value of Marginal Product

The extra revenue a firm gains by employing an additional unit of input.