Answer to Question 1
True
Answer to Question 2
Marginal analysis examines what happens to a firm's costs and revenues when production changes by one unit. Both production costs and revenues must be evaluated.
Marginal revenue is the change in total revenue that arises from the sale of an additional unit of a product. Most firms face downward-sloping demand curves for their products. This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold, and marginal revenue decreases as price decreases and quantity sold increases. Eventually, marginal revenue will reach zero, and the sale of additional units actually causes the firm to lose money. Before the firm can determine whether a unit will be profitable, it must calculate costs and revenue, because profit equals revenue minus cost. If MR is the increase in revenue generated by the sale of a single additional unit of a product, and MC is the additional cost a single unit adds to a firm, subtracting MR from MC will tell us whether the unit is profitable. Any unit for which MR exceeds MC adds to a firm's profits, and any unit for which MC exceeds MR subtracts from profits.
