Question

Food Fanatics caters meals where their cost of producing an extra meal is $25. Each of their meals is standard and sells for $20. At this rate what should the company do

Answer 1

Answer: b.Produce fewer meals and increase their profit

Explanation:

The profit maximising point for production is generally said to be the point where Marginal Revenue equals Marginal Cost. At this point, the company producing is maximising its resources and wasting nothing whilst getting the highest amount of profit they can.

If they produce at a point higher than this point then Marginal Cost will be be higher than Marginal Revenue which is not profitable. This is the situation with Food Fanatics. They are producing at a point higher than the profit maximising level because their Marginal Revenue of $20 is lower than their marginal cost of $25.

The remedy to this is to produce fewer meals to the point where Marginal Revenue equals Marginal Cost, thereby increasing their profit.