Question

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits, the firm should _____.(A) decrease production to less than 800 units(B) increase production to more than 800 unit(C) continue producing 800

Answer 1

Answer:

d. decrease production to less than 500 units.

Explanation:

The demand curve facing a firm in perfectly competitive market is infinitely elastic, The horizontal demand curve stands as the perfectly competitive firm's marginal revenue curve as well as average revenue curve, which means Price (P) = Average Revenue (AR) = Marginal Revenue (MR).

The equilibrium equation for profit maximization is MR = MC

The disequilibrium equation are:  

1. If MC is greater than MR (The firm should reduce production for higher profit

2. If MC less than MR (The firm should increase production for higher profit

In this question, MC = $1.50 and MR = $1.25 (MR = P). Therefore, the firm should decrease output to less than 500 to maximize profit,