Question

State whether true or false and briefly explain why:

Answer 1

Answer:

Stating True or False

P > MC, so producing more would mean that the marginal cost increases to match the market price. FALSE

P = AC, so producing more would mean that the average cost would exceed the price reducing profits. FALSE

P = MC, so producing more would mean that the marginal cost would exceed the price reducing profits.  TRUE

MR < MC, so producing more would mean that the marginal cost increases to match the market price. FALSE

Explanation:

All profit-maximizing producers accept a market price (P) that is equal to the marginal cost (MC), i.e. (P = MC).  At this point, the market price does not exceed the marginal costs (costs of factors of production).  When = P > MC, it shows that the benefits of producing more goods exceed the production costs, to the benefit of the society.   However, if P < MC, then the social costs of producing the goods exceed the social benefits, signalling that the economy should produce less.