Question 37

Decrease production.

Given that the marginal cost of producing a piece of luggage is $92 while the marginal revenue is only $81, the firm should decrease production since it is incurring a loss on each unit produced.

A) Decrease production.

This option is correct because the firm is experiencing a situation where the marginal cost exceeds the marginal revenue. When marginal costs are higher than marginal revenues, producing additional units will lead to greater losses, thus making it more financially sound to decrease production.

B) Enter the market.

Entering the market is not a viable option for the firm in this scenario. The firm is already producing luggage, and since the marginal revenue is less than the marginal cost, entering the market would only exacerbate the financial issues by incurring additional costs without sufficient revenue.

C) Increase production.

Increasing production would be detrimental for the firm given the current financial metrics. With marginal costs at $92 and marginal revenue at $81, producing more would lead to larger losses, as each additional unit would further increase the deficit between costs and revenues.

D) Restart production.

This option does not apply to the scenario as it implies that production had previously ceased. The firm is already producing luggage but needs to reevaluate its production levels due to the unfavorable cost-revenue situation. Restarting production would not solve the existing issue of higher costs compared to revenue.

Conclusion

The best course of action for the firm is to decrease production, as it is currently losing money on each unit produced. All other options fail to address the critical issue of managing costs effectively in relation to revenue, which is essential for the firm's financial sustainability.