Question

For a firm producing at any level of output GREATER than the most profitable one, a reduction in output decreases total revenue _____ total cost. Group of answer choices

Answer 1

Answer: D. less than

Explanation:

Firms generally maximise output at the point where Marginal Revenue equals Marginal Cost. Any output greater than this point will lead to a higher amount of marginal cost being incurred vs marginal revenue which also means that a higher proportion of total cost was being incurred.

If a company therefore decides to remedy this and reduces output, this will lead to a fall in both revenue and cost. However, because the cost had been higher past that point, when it falls back to the maximising level, costs will fall more than revenue so that marginal revenue will equal cost again. This also means that total cost would fall more than total revenue.