Question

Suppose Brenda's farm, which operates in a perfectly competitive market for soybeans, produces 32,000 bushels of soybeans and sells them at the going market price of $4.50 per bushel. The farm's marginal cost of the last bushel sold is $4.40. What would you advise Brenda to do to increase her profit? Question 22 options: Lower the price so that she could sell more... Increase production and continue to charge the same price... Raise the price without changing production ... Raise the price and increase production

Answer 1

In a perfectly competitive market, the firm has many competitors and it takes the market price as given. The firm thus has MR=P. Therefore, in a perfectly competitive setup, each firm maximizes output by setting P=MR=MC. In this case, the MC<P or the firm can increase profit by selling and producing more units that it currently is.

Given the options:

• The firm has no influence on price, lowering the price will make each firm to follow suit which will create excess demand, and the price will eventually go back up.
• The firm takes price as given and to maximize profit it should increase production, which will increase its marginal cost and also profit.
• Raising the price will force the firm to go out of business because there are other firms that sell the exact same good at a lower price and hence no one will buy from a high-cost firm.
• Raising price is not an option for a competitive firm.

Therefore, the correct option is:  Increase production and continue to charge the same price