Question

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits, the firm should

Answer 1

Answer:

decrease production to less than 500 units

Explanation:

Answer 2

The correct answer is: d. increase production to more than 500 units.

In our question, we have the following information:

q
=
500
A
V
C
m
i
n
=
$
1
M
C
=
$
1.5
P
=
$
1.25

A perfectly competitive firm shuts down in the short run if the market price is less than the minimum average variable cost. For this firm,
P
>
A
V
C
m
i
n
. Therefore, the firm should not shut-down.

A perfectly competitive firm maximizes its profits by producing at the point where P=MC. For this firm, P