Question

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's
A. total revenues equal his total economic costs.
B. marginal revenue exceeds his total cost.
C. marginal revenue exceeds his marginal cost.
D. marginal cost exceeds his marginal revenue.

Answer 1

Answer:

The correct answer is C. marginal revenue exceeds his marginal cost.

Explanation:

The income obtained from the marginal unit (marginal income IM) is equal to the cost of producing the marginal unit (marginal cost CM). The income obtained from the marginal unit (marginal income IM) is equal to the cost of producing the marginal unit (marginal cost CM). Remember that marginal Income is the change in total income for each additional amount sold IM, and the marginal cost is the cost of producing an additional unit of the good.

The marginal cost and the marginal income are equalized, which implies that the profits are maximum.

So we can say that:

1. If the marginal revenue exceeds the marginal cost, the company must increase production.
2. If the marginal income is less than the marginal cost, production should be reduced.
3. If the marginal income is equal to the marginal cost, the company is maximizing its profits and should not change its production