Which of the following statements best expresses a firm's profit-maximizing decision rule?
A)If marginal revenue is greater than marginal cost, the firm should increase its output.
B)If marginal revenue is less than marginal cost, the firm should shut down in the short run.
C)If marginal revenue equals marginal cost, the firm should produce exactly one more unit of output.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Profit is maximized when marginal revenue equals marginal cost. Therefore, if marginal revenue is greater than marginal cost, producing one more unit will increase profits. If marginal revenue is less than marginal cost, producing one more unit will decrease profits. Shutting down in the short run is only necessary if the revenue that would be generated from producing one more unit is less than the variable cost of producing that unit. Therefore, statement B is not always true. Statement C is not a firm's profit-maximizing decision rule, but rather the condition for profit maximization.

Which of the Following Statements Best Expresses a Firm's Profit-Maximizing