Question

1. You are the manager of a small U.S. firm that sells nails in a competitive market as there are hundreds of other firms selling this standardized commodity. Stores view your nails as identical as to those available from other firms. You are concerned about two recent events that appeared in the news. First, foreign competitors are existing the market due to increased input prices (labor in their home countries). Second, a rise in global income had led to an increased demand for housing, and nails are a primary input into construction. Based on this information, should you plan to increase or decrease production of nails in the short-run (and why?)

Answer 1

The firm should increase the production of nails in the short run.

As the firm is in a perfect competitive market so its price depends on the market price and where MC=MR.The exit by the foreign firms will decrease the market supply but as the demand is increasing due to rise in demand for housing,so this will lead to an increase in the prices of nails.

By increasing the production,the firm will be able to sell the nails at the higher market price and increase its revenue by increasing the output since producing at the lower output and lower price would no longer maximize its profit as it's MC>MR.