Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm
A)could increase profits by reducing output from 300 units.
B)could increase profits by increasing output from 300 units.
C)should decide to increase the price above $20.
D)should shut down, since it must be losing money.

Question

Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm
A)​could increase profits by reducing output from 300 units.
B)​could increase profits by increasing output from 300 units.
C)​should decide to increase the price above $20.
D)​should shut down, since it must be losing money.

Quizplus · Accepted Answer

In a perfectly competitive market, the firm's profit-maximizing level of output is where marginal cost equals marginal revenue. Since the current price is $20 and the marginal cost at 300 units is $22, this means that producing an additional unit would cost more than the revenue it generates, resulting in a loss of $2 for each unit produced. Therefore, the firm could increase its profits by reducing its output from 300 units. At a lower output level, the marginal cost will be less than the price, which means the firm can earn a profit.

Consider a Firm That Operates in a Perfectly Competitive Market