Question

Take a scenario where a profit maximizing company is in a perfectly competitive industry. When marginal costs are falling, what should it do?

a.Maintain its output levels on the downwards sloping portion of the marginal cost curve.
b.Reduce prices.

c.Reduce its output.

d.Raise output until marginal costs are equal to marginal revenue.

Answer 1

Answer : The answer is option d.

For perfectly competitive industry the profit maximizing condition is Price = Marginal Revenue = Marginal Cost. The marginal cost increase if output increase. So, if the marginal cost is falling then to maximize profit the perfectly competitive industry should increase the output level until Marginal Revenue = Marginal Cost occurs. Hence except option d other options are not correct. Therefore, option d is the correct answer.

answered by: anonymous