Question

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.

Answer 1

Ans- Marginal profit is the profit earned by a firm or individual when one additional or marginal unit is produced and sold.Marginal profit is the difference between marginal cost and marginal product (also known as marginal revenue). Marginal profit analysis is helpful because it can help determine whether to expand or contract production or to stop production altogether, a moment known as a shutdown point. At a certain point, the marginal profit will become zero and then turn negative as scale increases beyond its intended capacity. At this point, the firm experiences diseconomies of scale. Companies will thus tend to increase production until marginal cost equals marginal product, which is when marginal profit equals zero. In other words, when marginal cost and marginal product (revenue) is zero, there's no additional profit earned for producing an added unit.

If the marginal profit of a firm turns negative, its management may decide to scale back production, halt production temporarily, or abandon the business altogether if it appears that positive marginal profits will not return.