Question

Suppose a car manufacturer discovers that the marginal cost of the last car produced was $15,000, while the marginal revenue was $14,000. In order to increase profits, the car manufacturer should __________ the quantity of cars produced.

Answer 1

Answer:

decrease

Explanation:

If the marginal cost of producing one extra unit is larger than the marginal revenue earned by selling one extra unit, then the production should either be reduced or halted.

Generally in very competitive industries, like car industries, when the marginal cost exceeds the marginal revenue then the company should stop production in the short run until the price increases.

One real life example we can use is the traditional sales battle to decide who sells the most sedan cars in America between Honda and Toyota. Toyota has the advantage of fleet selling over Honda, since Honda is not willing to offer steep discounts on fleet sales as Toyota does. But does selling more sedans equals larger profits? Not necessarily, since fleet sales require steep discounts, Toyota's profitability is reduced or nearly eliminated. Honda decides to lower their production levels so that their marginal costs don't exceed their marginal revenue.