Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price exceeds the firm's marginal and average variable costs. It follows that producing one more cupcake will cause this firm's
A) total cost to decrease.
B) profits to increase.
C) profits to decrease.
D) profits to remain unchanged.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if the price exceeds the marginal and average variable costs, producing one more unit (in this case, a cupcake) will increase the firm's profits. This is because the revenue from selling the additional cupcake will be greater than the cost of producing it.

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