Question 31

Decrease production

When the marginal cost of producing a piece of luggage is $92 and the marginal revenue is $81, the firm should decrease production. This is because the cost of producing one additional unit exceeds the revenue gained from that unit, indicating a loss on each additional piece produced.

A) Restart production

Restarting production would not be advisable in this scenario since the firm is already facing a situation where the marginal cost exceeds the marginal revenue. This would further compound the losses rather than resolve them.

B) Decrease production

Decreasing production is the most logical action as it would help the firm reduce losses. When marginal cost exceeds marginal revenue, producing less would ensure that the firm does not incur additional losses on each unit produced.

C) Increase production

Increasing production would be counterproductive given that the marginal cost is higher than the marginal revenue. This would result in further losses, as the firm would be incurring more costs without corresponding revenue to cover those costs.

D) Enter the market

Entering the market is not a viable option when the current production is unprofitable. The firm's existing marginal cost exceeding marginal revenue indicates that it is not in a position to successfully compete or sustain new market entry without first addressing its current production inefficiencies.

Conclusion

The best action for the firm is to decrease production, as this will help minimize losses when marginal costs outstrip marginal revenues. All other options either exacerbate the current financial situation or are not feasible given the loss-making scenario. Thus, decreasing production directly addresses the economic principle of optimizing profitability.