Question

A new idea to improve the production process enables firm to lower its constant marginal cost of production from $40 per unit to $30 unit, Assuming downward sloping demand and constant per unit pricing, what happens to the firm's optimal price and quantity produced?

	A.	Price goes down and quantity goes down
	B.	Price goes down and quantity goes up
	C.	Price goes up and quantity goes down
	D.	Price goes up and quantity goes up

Answer 1

The firm produces at a point at which the marginal revenue of a firm is equal to the marginal cost of the firm.

Here the marginal cost is constant and due to a new idea to improve the production process the constant marginal cost of the production of firm decreases from $40 per unit to $30 per unit.

The demand Curve is downward-sloping and before the marginal revenue curve is also downward sloping. So as the marginal cost decreases, marginal revenue curve cuts the marginal cost curve at a higher quantity. This leads to to a decrease in price.

So firm's optimal price goes down and optimal quantity produced goes up.

This is shown in the diagram below:

Hence option B is correct.