Question

Ramona is an asparagus farmer and the world asparagus market is perfectly competitive.

The market price is ​$13 a bundle.

Ramona sells 1,400 bundles a week and her marginal cost is ​$18 a bundle.

The market price falls to ​$7 a bundle​, and Ramona cuts her output to 875 bundles a week.

Ramona's average variable cost and marginal cost fall to ​$7 a bundle.

Ramona is​ ______.

A.not maximizing profit because marginal revenue does not equal marginal cost

B.maximizing profit and she is incurring an economic loss

C.not maximizing profit because she has cut her asparagus production

D.maximizing profit and she is making an economic profit

E.not maximizing profit because she is incurring an economic loss

Answer 1

a) For a perfectly comeptitive market the price and the marginal cost will be same, and that is the profit maximising condition in the market. here, the MC and the price is at $7 so she is maximising profit but as the price is equal to the AVC it will be below the ATC and she will be at an economic loss.

The answer is "B".