The marginal revenue to produce a smartphone is $200, but the marginal cost is $150. What is the best action for the respective firm?

Rationale

Increase production.

When the marginal revenue exceeds the marginal cost, as indicated by the $200 revenue against a $150 cost, it is profitable for the firm to increase production. This action will enhance the firm's overall profit since each additional unit produced contributes positively to the bottom line.

A (Exit the market altogether.) YOUR ANSWER

Exiting the market is a drastic measure that would not be justified in this scenario. The firm is currently making a profit on each additional smartphone produced, as indicated by the positive difference between marginal revenue and marginal cost. Instead of exiting, the firm should capitalize on its profitable operations.

B (Pause production.) YOUR ANSWER

Pausing production would prevent the firm from capitalizing on the profitable opportunity presented by the current marginal revenue exceeding the marginal cost. This choice would effectively lead to lost revenue and would not be a rational decision given the favorable profit situation.

C (Increase production.) CORRECT

Increasing production is the optimal action here, as the additional revenue from selling more smartphones exceeds the cost of producing them. This choice aligns with profit maximization principles, allowing the firm to take full advantage of the profitable conditions in the market.

D (Decrease production.) YOUR ANSWER

Decreasing production would lead to reduced revenue and is counterproductive when marginal revenue surpasses marginal cost. Since the firm is currently in a profitable position, scaling back production would diminish potential profits and should not be considered.

Conclusion

In summary, the clear choice for the firm in this scenario is to increase production, as the marginal revenue of $200 surpasses the marginal cost of $150. This decision allows the firm to maximize profits by producing and selling more smartphones, thereby taking advantage of the favorable economic conditions. Other options, such as exiting the market, pausing, or decreasing production, would not make sense given the current profitability.

The marginal revenue to produce a smartphone is $200, but the marginal cost is $150. What is the best action for the respective firm?

Increase production.

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