Answer to Question #308004 in Macroeconomics for Anuj

Question

Three managers of the Magic Potion Company

are discussing a possible increase in production.

Each suggests a way to make this decision.

Harry: We should examine whether our

company’s productivity—gallons

of potion per worker—would rise

or fall.

Ron: We should examine whether our

average cost—cost per worker—

would rise or fall.

Hermione: We should examine whether

the extra revenue from selling

the additional potion would be

greater or smaller than the extra

costs.

Answer 1

In this case, where the three managers of the Magic Potion Company are evaluating a possible increase in production it can be said that;

Hermione's suggestion is the one since he suggested to use profit-maximizing rule, of which according to it Marginal revenue (MR)= Marginal cost (MC).