Question

A business manufacturer has continued producing bicycles until the marginal cost reached $200, at which marginal revenue also reached $200. What would be the effect of producing an addition bicycle? Explain.

Answer 1

Answer:

Its percentage profit would decrease.

Explanation:

Marginal cost and marginal revenue is the cost of producing one more product, and the marginal revenue is the profit made by selling one more product, when both are equal that means that the company has reached the point where the graphs of cost and revenue are drafting away, if the company continues to produce bicycles the company would start to loose money.

Answer 2

The optimal amount of production for a manufacturing company that seeks to maximize its profit in a perfectly competitive market, is exactly that quantity for which the marginal cost equals the marginal revenue.

By definition, the marginal cost refers to the cost of producing one extra unit, and the marginal revenue would be the revenue collected by selling one extra unit (the price paid by a consumer in the case of a competitive market).

If the firm, which is at the profit maximization situation (marginal cost=marginal revenue = $200), decides to produce one extra unit, the marginal cost will grow over the marginal revenue. This would lead the company to an unoptimal situation, as the firm will be losing money with each additional bycicle, and hence should produce less, until reaching the optimal equality again.