Section 4.2.2 claims that the firm never extracts to a level atwhich marginal profit is...

Section 4.2.2 claims that the firm never extracts to a level at which marginal profit is negative.
Explain, in a way that a non-economist will understand, why this claim is true.

Expert Solution

Let us first understand what marginal profit is all about.

The profit that is achieved on production of one additional unit such that the additional revenue generated is greater than the additional cost, it is called marginal profit.

This profit, when it is positive is a state of economies of scale because as and when the production increases, this profit remians positive. However, at a certain point of time, this profit might become zero. But as soon as this profit becomes negative, it means that the firm should stop producing an additional product because such production is leading to a higher increase in cost as compared to the increase in profit by producing it.

Thus, whenever the management comes across such a situation where Marginal Profit turns negative, it either decides to halt production or even shut the business altogether.

Therefore, it is imperative to conclude that the firm never extracts to a level at which marginal profit is negative.

Rahul Sunny answered 2 years ago

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