Question

Describe the process that a firm uses to determine the quantity of product it should produce and if it should produce at all.

Answer 1

Usually a firmbesides the total amount of quantity that it should be produced based on the profit maximizing output or the output that will give maximum profit. the maximum profit is actually achieved by calculating the marginal revenue and marginal cost where the profit levels are maximum when they both are equal because marginal revenue and marginal cost is increasing per and initially for unit there will be higher amount of profit and later on the continuously decrease and merge at a point at which the marginal profit is zero and after that there would be marginal loss and that is the reason why the maximum profit level is when the marginal profit is zero. So that they keep on producing until them marginal revenue equals marginal cost. also it is important to identify whether it should use it or not by understanding the average variable cost and price and they should produce only when the average variable cost is less than the price because there would be no point in continuing in the business if it does not recover even the variable costand therefore if the price is lesser than the average variable cost the firm should shut down