How does a firm in a competitive market decide what level of output to produce in order to maximize its profit?
What will be an ideal response?
A firm can maximize profits by producing up to the point where the additional revenue earned from one extra unit is equal to the additional cost of each unit, i.e. at the point where marginal revenue is equal to marginal cost. For competitive firms, marginal revenue is equal to price, so these firms will maximize profits by producing at the point where price is equal to marginal cost.
There are two caveats to the price equal to marginal cost rule. First, in the short run the firm price must be at least as large as average variable cost; otherwise the firm will shut down. Second, in the long run price must be as least as large as average cost; otherwise the firm will exit.
You might also like to view...
Scarcity arises because
A) resources are finite and are inadequate to meet all human wants. B) production of goods and services is always slow. C) companies are slow to explore for new resources. D) a large number of people live in poverty.
Most markets in the United States:
A. have some degree of competitiveness, but are not perfectly competitive. B. have very few competitive features and so are regulated by the government. C. are monopolies. D. are perfectly competitive.
There is a trade-off between unemployment and inflation when the aggregate
A. Supply curve is upward-sloping. B. Supply curve is vertical. C. Demand curve is upward-sloping. D. Supply curve is downward-sloping.
When x increases
A) IS curve shifts to the left. B) IS curve shifts to the right. C) LM curve shifts upward. D) LM curve shifts downward.