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
When the marginal revenue exceeds the marginal cost, the firm should increase production to maximize profit. In this scenario, with marginal revenue at $200 and marginal cost at $150, the firm can benefit from producing additional units, as each new unit generates a profit of $50.
This choice is the optimal action for the firm, as the profit from each additional unit produced is greater than the cost incurred to produce it. By increasing production, the firm can capitalize on the profit margin and enhance overall profitability.
Pausing production would be counterproductive in this scenario since the firm is currently able to generate a profit on each unit sold. Doing so would prevent the firm from taking advantage of the favorable marginal revenue versus marginal cost situation, ultimately resulting in lost profits.
Exiting the market is an extreme action that would only be warranted if the firm consistently faced losses. Since the marginal revenue exceeds marginal cost, the firm is currently in a profitable position and should instead focus on increasing production to maintain or enhance its market presence.
Decreasing production would reduce potential profits, as the firm is currently in a situation where selling additional units would generate extra revenue that exceeds the associated costs. Lowering production would result in lost opportunities for profit maximization.
In this scenario, where marginal revenue exceeds marginal cost, the best action for the firm is to increase production. This strategy allows the firm to maximize its profits while capitalizing on the favorable economic conditions. Other options, such as pausing or decreasing production or exiting the market, would hinder profitability and are not justified given the current revenue and cost dynamics.
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