Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price equals this firmʹs marginal cost. Assuming price exceeds average variable cost, to maximize profits Cathy's should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, profit maximization occurs where price equals marginal cost, as long as the price is above the average variable cost. Since Cathy's Cupcake Company is operating at this point, they are already maximizing their profits and should make no adjustments.

Assume Cathy's Cupcake Company Operates in a Perfectly Competitive Market