Question 47

Increase production.

Given that the marginal revenue of producing a smartphone is $200 while the marginal cost is $150, the firm stands to gain $50 for each additional smartphone produced. This indicates that increasing production is the optimal choice as the firm can enhance its profits.

A) Exit the market altogether.

Exiting the market is not a viable option since the firm is currently in a position where it can make a profit on each additional unit produced. The firm’s marginal revenue exceeds its marginal cost, suggesting that remaining in the market and expanding operations would be more beneficial.

B) Pause production.

Pausing production would prevent the firm from capitalizing on the profit opportunity presented by the difference between marginal revenue and marginal cost. Since the firm can profit from increasing output, halting production would be counterproductive.

C) Increase production.

Increasing production is the best course of action for the firm. With marginal revenue of $200 surpassing the marginal cost of $150, producing more smartphones allows the firm to maximize its profits, earning an additional $50 for each smartphone produced.

D) Decrease production.

Decreasing production would lead to a loss of potential profits, as the firm could still benefit from producing additional units. The existing margin indicates that it is advantageous to produce more rather than less, making this option less favorable.

Conclusion

Increasing production is the correct action for the firm, as it allows for profit maximization given the favorable margin between marginal revenue and marginal cost. All other options either hinder potential profits or are not aligned with the firm's current profitable position. Therefore, the choice to increase production is justified and strategically sound.