Question

A perfectly competitive firm is producing 40 units of output. The market price is $10 and...

A perfectly competitive firm is producing 40 units of output. The market price is $10 and the firm's marginal cost is $8. The firm should:

increase production.

lower its price.

raise its price.

decrease production.

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Answer #1

Increase production

Under perfect competition, market price is equal to marginal revenue. Marginal revenue refers to change in total revenue when an additional unit of output is sold. Marginal cost is the change in total cost when an additional unit of output is produced. When marginal revenue or price is greater than marginal cost then the firm should increase its output because it is profitable for the firm to produce an extra unit of output as revenue generated is more than the cost incurred. The firm should increase production until price or marginal revenue equals to marginal cost.

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