Difficulty: Easy

Average Score: 100%

When is it best for a firm to decrease production?

Rationale

When marginal cost is greater than marginal revenue.

In economic terms, a firm should decrease production when the cost of producing an additional unit (marginal cost) exceeds the revenue generated from selling that unit (marginal revenue). This situation indicates that the firm is losing profit on each additional unit produced, and reducing production would help minimize losses.

A (When marginal cost is greater than marginal revenue) CORRECT

This choice correctly identifies the condition under which a firm should reduce production. If the marginal cost of producing an additional unit surpasses the marginal revenue earned from that unit, the firm incurs a loss on each extra unit produced. Therefore, decreasing production is the rational response to improve profitability.

B (When the price of a unit covers the average variable cost after a short term stop) YOUR ANSWER

This option suggests that production can continue as long as the price covers average variable costs. While this is true for the short run, it does not address the situation where marginal costs exceed marginal revenue, which is crucial for determining optimal production levels. Continuing production under this condition can still lead to overall losses.

C (When total revenue is greater than total cost) YOUR ANSWER

This choice indicates a profitable scenario for the firm, suggesting that it should continue operating rather than decrease production. If total revenue exceeds total cost, the firm is making a profit, which is contrary to the need for a reduction in production.

D (When the average variable cost is less than the price of a unit after a short term stop) YOUR ANSWER

While this condition is necessary for short-run production decisions, it does not encompass the critical aspect of marginal analysis. A firm could still face losses if marginal costs exceed marginal revenues, making this statement insufficient for determining the optimal level of output.

Conclusion

Determining when to decrease production is essential for a firm’s profitability. The correct scenario arises when marginal cost exceeds marginal revenue, signaling that further production would lead to financial losses. The other options, while relevant in different contexts, do not adequately reflect the critical relationship between marginal costs and revenues necessary for sound economic decision-making.

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