Question

If a competitive firm is currently producing a level of output at which profit is not maximized, then it must be true that a. marginal revenue exceeds marginal cost. b. marginal cost exceeds marginal revenue. c. total cost exceeds total revenue. d. None of the above is correct.

Answer 1

Answer:

a. Marginal revenue exceeds marginal cost.

Explanation:

Note: The words "profit is not maximized" have been interpreted as, "the firm at current level of output earns profits, but not maximum profits it can earn." The answer provided herein is based upon this assumption.

Marginal revenue (MR) refers to the addition to total revenue when an additional unit of output is sold.

Similarly, marginal cost (MC) refers to the addition to total cost of production, when an additional unit is produced.

For an optimal level of production, and as a condition for profit maximization under perfect competition,

MR = MC and the marginal cost should increase post the level of output at which MR = MC.

If a competitive firm operates at a level wherein profits are not maximized, but the firm does earn profits, it indicates the stage of production wherein the marginal revenue exceeds the marginal cost.

Thus, as firm produces more and more units of output, it would reach a stage wherein marginal revenue would equal marginal costs and profits shall be maximized.