To maximize profits, a firm should:A.set MRP = MRC regardless of its market setting.B.set MRP = MRC only if the firm is in a perfectly competitive market.C.set the total cost of the resource equal to the total value of production.D.set MRP = MRC only if the firm has significant market power.E.ignore the cost of the resource and only consider the MRP.
Question
To maximize profits, a firm should:A.set MRP = MRC regardless of its market setting.B.set MRP = MRC only if the firm is in a perfectly competitive market.C.set the total cost of the resource equal to the total value of production.D.set MRP = MRC only if the firm has significant market power.E.ignore the cost of the resource and only consider the MRP.
Solution
To maximize profits, a firm should set Marginal Revenue Product (MRP) equal to Marginal Resource Cost (MRC) regardless of its market setting. This is option A.
Here's why:
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MRP is the additional revenue a firm receives from employing an additional unit of a resource, while MRC is the additional cost of employing an additional unit of a resource.
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In order to maximize profits, a firm should continue to employ resources as long as the MRP is greater than or equal to the MRC. This is because the firm is still gaining more revenue than it is spending on resources.
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If the MRP is less than the MRC, the firm is spending more on resources than it is gaining in revenue, so it should reduce resource employment.
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This rule applies regardless of the market setting, whether it's perfect competition, monopoly, or anything in between. Therefore, the correct answer is A.
Similar Questions
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The profit maximising output of a competitive firm is given as, MR=MC. This may also be written as;Group of answer choicesP=ACP=MCMR=PMR=AC
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