Sure, let’s analyze the given information step-by-step to reach a conclusion.
1. Marginal Revenue (MR) and Marginal Cost (MC):
- Marginal Revenue (MR): [tex]$7
- Marginal Cost (MC): $[/tex]6
Marginal revenue is the additional revenue that the firm earns by selling one more unit of output, and marginal cost is the additional cost incurred by producing one more unit of output.
Since [tex]\( \text{MR} > \text{MC} \)[/tex] (i.e., [tex]$7 > $[/tex]6), it indicates that increasing production will increase the firm's profits. This is because the additional revenue from producing one more unit exceeds the additional cost of producing that unit.
2. Average Variable Cost (AVC) and Average Total Cost (ATC):
- Average Variable Cost (AVC): [tex]$5
- Average Total Cost (ATC): $[/tex]5
Average variable cost is the variable cost per unit of output, while average total cost includes both fixed and variable costs per unit of output.
3. Profitability Analysis:
- The Marginal Revenue (MR) of [tex]$7 is greater than the Average Total Cost (ATC) of $[/tex]5, indicating that the firm is currently making a profit on each unit of output because it sells each unit for more than the total cost per unit.
- Since the firm is making a profit on each unit, it is in a good financial position.
4. Optimal Production Decision:
- Given that [tex]\( \text{MR} > \text{MC} \)[/tex], the firm should increase production to increase overall profits.
- If MR equals MC, the firm is at the optimal level of output and is maximizing profit. Increasing or decreasing production would lower profit.
- If MR is less than MC, the firm should reduce production to avoid losses.
Conclusion: Since the marginal revenue ([tex]$7) is greater than the marginal cost ($[/tex]6), the firm should increase its production to increase its profits. Moreover, since the average total cost is less than the marginal revenue, the firm is already profitable at the current level of production.
Therefore, the most accurate conclusion based on the given information is:
“Increase production to increase profits.”
