Question

Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the 12th pair is $84, and the marginal revenue of the 12th pair is $70. What would you advise Mr. Raiman to do? A. shut down the business B. produce more custom-made shoes C. decrease the price D. produce fewer custom-made shoes

Answer 1

Answer:

D. produce fewer custom-made shoes

Explanation:

Marginal Revenue is the amount of profit made from and additional unit in this case his custom made shoes. Marginal Cost is the associated amount of cost or expense he incurs in producing that additional unit. Mr Raiman will only make a profit when the marginal revenue is less than his marginal cost ie. MR>MC. Once his MR=MC he maximizes his profit earning capacity. As you can see his MC>MR meaning he is running a loss, which will eventually diminish the profit he has already made. He should therefore lower the number of shoes he makes a week in order to continue maximizing his profit.