Answer to Question #105211 in Microeconomics for Nhlaphu Mulaudzi

Question

Question:
1-Economists say that firms maximise profit by producing at a level of output where marginal cost is equal to marginal revenue.The owners of a firm respond, "that's a lot of nonsense.I do not even know what marginal cost and marginal revenue mean. How can i be doing something i don't even know about?" How would you react to this response?(5 marks)

NB:reference list (bibliography)
:citation (text reference)

Answer 1

In general, marginal cost, marginal revenue and the profit-maximizing rule are tools that are used by business owners and operators to understand and explain how their firms are operating and predict how they will react in particular circumstances (Levitt, 2016). Although not all firms use these concepts directly, business owners and operators tend to think in line and reason along these concepts when making and taking business decisions even without their knowledge. For instance: Will it be profitable to expand production in my business? What will the extra (marginal) revenue for this action? What will the extra (marginal) cost be? What will happen to profits if i increase production?

References

Levitt, S. D. (2016). Bagels and donuts for sale: A case study in profit maximization. Research in Economics, 70(4), 518-535.