Economics · Producer Behaviour and Theory of Supply
Ravi, a producer, notices that when he increases his output, the total cost increases significantly due to rising variable costs. Despite increasing output, his marginal cost is greater than marginal revenue. Which of the following statements explains Ravi's situation best?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Ravi is operating at the optimal profit-maximizing output level where marginal cost equals marginal revenue.
- 2Ravi should continue to indefinitely increase output since fixed costs remain unchanged.
- 3Ravi is in a stage of increasing returns, where marginal cost is less than marginal revenue.
- 4Ravi is operating in a stage of diminishing returns, where marginal cost exceeds marginal revenue.✓
Correct answer
Ravi is operating in a stage of diminishing returns, where marginal cost exceeds marginal revenue.
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