Question

Owners of firms understand that lower prices will attract more customers. Why can firms not always reduce prices until they increase sales and profits?
A. Consumers do not always like low prices.
B. If marginal production costs exceed marginal revenues, the firm will suffer losses, not profits.
C. If opportunity cost for the consumers exceeds the firm's production costs, there can be no profit.
D. Owners will never reduce prices even when it means increased profits.

Answer 1

The reason that firms cannot always reduce prices until they increase sales and profits is the cost of marginal production costs. If marginal production costs exceed marginal revenues, the firm will suffer losses, not profits. The answer to your question is B.

Answer 2

Answer:

B. If marginal production costs exceed marginal revenues, the firm will suffer losses, not profits.

Explanation:

In a market economy, firms produce quantity until price equals marginal cost. Price is marginal revenue, it means how much a firm gets by selling one more unit of the product. Marginal cost is a measure that aims to measure the cost of producing one more unit of each product. For example, if a pillow factory produces 100 pillows, the marginal cost will be the production cost of the 101st pillow and the marginal revenue will be the value at which the firm sold the 101st pillow. Under the assumptions of microeconomic theory, if marginal cost exceeds marginal revenue the company will have losses if it continues to produce. Therefore, the correct answer is (B).