Question

In a perfectly competitive industry the market price is $25. A firm is currently producing 10,000 units of output; average total cost is $28, marginal cost is $20, and average variable cost is $20. The firm should

Select one: a. raise price because the firm is losing money. b. keep output the same because the firm is producing at minimum average variable cost. c. produce more because the next unit of output increases profit by $5. d. produce less because the next unit of output decreased profit by $3. e. shut down because the firm is losing money.

Answer 1

Answer : The answer is option c.

Here the firm produces that output level where MC = AVC = $20 occurs. For perfectly competitive firm the profit maximizing condition is Price = MC. Now if the firm increase the production level, the firm will reach at profit maximizing output level where the Price = MC = $25 will occur. As a result, the per unit profit will increase by (25 - 20) = $5. Hence except option c other options are not correct. Therefore, option c is the correct answer.