Question 39

It is best for a firm to decrease production when marginal cost is greater than marginal revenue.

When a firm's marginal cost exceeds its marginal revenue, it indicates that producing additional units is resulting in a loss for each unit produced. Therefore, decreasing production will help the firm minimize losses and optimize its overall financial performance.

A) When marginal cost is greater than marginal revenue

This option is correct because when the marginal cost surpasses the marginal revenue, the firm is not covering the costs associated with producing additional units. This situation suggests that the firm should reduce production to avoid incurring further losses.

B) When the price of a unit covers the average variable cost after a short term stop

This option is incorrect as it implies that the firm should continue production if the price covers average variable costs. Even if the price covers these costs, the firm may still incur losses if marginal costs exceed marginal revenue, which is the more critical consideration for production decisions.

C) When total revenue is greater than total cost

This option is also incorrect. In fact, when total revenue exceeds total cost, a firm is generating profit and has no reason to decrease production. The situation described here does not warrant a reduction in output.

D) When the average variable cost is less than the price of a unit after a short term stop

This option is incorrect as well. While it is beneficial for the firm if the price exceeds average variable costs, it does not address the relationship between marginal cost and marginal revenue, which is crucial for determining the necessity of decreasing production.

Conclusion

In summary, the best time for a firm to decrease production is when marginal cost exceeds marginal revenue, as this condition indicates that further production would increase losses. All other options either suggest continuing production despite potential losses or fail to address the critical relationship between marginal cost and marginal revenue. Thus, Option A is definitively the correct choice.