When producing a piece of luggage the marginal cost is $92 and the marginal revenue is $81. What is the best action for the respective firm?

Rationale

Decrease production.

When the marginal cost of producing a piece of luggage ($92) exceeds the marginal revenue ($81), the firm is losing money on each additional unit produced. To maximize profit or minimize losses, the firm should decrease production until marginal costs align more closely with marginal revenue.

A (Restart production) YOUR ANSWER

Restarting production is not advisable in this scenario because the firm is currently facing a situation where the costs of producing extra units surpass the revenue generated from those units. Restarting would exacerbate losses rather than mitigate them.

B (Decrease production) CORRECT

Decreasing production is the optimal choice as it allows the firm to stop incurring losses on each unit produced. By reducing output, the firm can better align its marginal costs with marginal revenues, ultimately aiding in the recovery of its financial standing.

C (Increase production) YOUR ANSWER

Increasing production would lead to even higher losses, as the marginal cost exceeds the marginal revenue. This action would not only worsen the financial situation but also strain resources further, making it an imprudent choice for the firm.

D (Enter the market) YOUR ANSWER

Entering the market is not a feasible option given that the firm is already struggling with existing production. Entering a new market would require additional investments and resources, which would not be justified while the current operations are unprofitable.

Conclusion

In this scenario, decreasing production is the most rational decision since the marginal cost exceeds marginal revenue, indicating that the firm is operating at a loss. Adjusting production levels to better match costs and revenues is essential for improving financial health and sustainability in the competitive market.

When producing a piece of luggage the marginal cost is $92 and the marginal revenue is $81. What is the best action for the respective firm?

Decrease production.

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