A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the nowlower price. Once the firm has adjusted, its a. marginal cost is higher than it was previously. b. average total cost is lower than it was previously. c. quantity of output is lower than it was previously. d. All of the above are correct.

Question

18-10-2019
Business

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A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the nowlower price. Once the firm has adjusted, its a. marginal cost is higher than it was previously. b. average total cost is lower than it was previously. c. quantity of output is lower than it was previously. d. All of the above are correct.

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Answer:

The correct answer is option c.

Explanation:

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive.

The price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the lower price.

A competitive firm will produce at the point where the marginal cost is equal to price. When the price is lowered the firm will produce at a point with lower marginal cost.

It will thus produce lesser output than what it was producing earlier. So the quantity of output will be lower than previously.