If a firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then which of the following is true?

• A. The firm should decrease its output to maximize profit.
• B. The firm is already maximizing profit at this output level.
• C. The firm should increase its output to maximize profit.
• D. The firm should shut down production immediately.

Answer: (C)

Verified step by step guidance

1. Recall the profit maximization rule: a firm maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), i.e., \(MR = MC\).
2. Understand the meaning of \(MR > MC\): producing one more unit adds more to revenue than it adds to cost, so increasing output will increase profit.
3. Analyze the implication: since \(MR > MC\), the firm is not yet maximizing profit because producing more units will increase total profit.
4. Conclude that the firm should increase its output to move closer to the profit-maximizing quantity where \(MR = MC\).
5. Recognize that decreasing output or shutting down is not optimal here because those actions would reduce profit when \(MR > MC\).