Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 14-4. When price rises from P2 to P3, the firm finds that
A)marginal cost exceeds marginal revenue at a production level of Q2.
B)if it produces at output level Q3 it will earn a positive profit.
C)expanding output to Q4 would leave the firm with losses.
D)it could increase profits by lowering output from Q3 to Q2.

Question

Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-4. When price rises from P2 to P3, the firm finds that
A)marginal cost exceeds marginal revenue at a production level of Q2. 
B)if it produces at output level Q3 it will earn a positive profit. 
C)expanding output to Q4 would leave the firm with losses. 
D)it could increase profits by lowering output from Q3 to Q2.

Quizplus · Accepted Answer

When the price rises from P2 to P3, the firm should expand its output to Q3 as the marginal cost is equal to marginal revenue at this production level. However, if it expands output further to Q4, the marginal cost exceeds marginal revenue, which would result in losses. Therefore, the best choice for the firm is to produce at output level Q3.

Figure 14-4 Suppose a Firm Operating in a Competitive Market Has the Has