Figure 1 Price ATC MC AVC P2 Quantity Refer to Figure 1. Which of the following

Question

Figure 1 Price ATC MC AVC P2 Quantity Refer to Figure 1. Which of the following statements best reflects the situation faced by the firm when price falls from P4 to P2? a. Average total cost is lower than at the previous level of output so it increases production. b. The firm will earn profit equal to (P P2) x Q2. c. Marginal revenue is lower than marginal cost at the previous level of output, so it 4. decreases production. Marginal revenue is higher than marginal cost at the previous level of output, so it increases production. d.

Explanation / Answer

Answer.) Marginal revenue is lower than marginal cost at the previous level of output , so it decreases production.

when market price is greater than minimum AVC then Marginal revenue and marginal cost (MC) are compared to decide the profit-maximizing output. If MR > MC, then the firm should continue to produce.

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