Give a scenario of a perfectly competitive firm finding the profit-maximizing level of output over a several-year period.

Question

What will be an ideal response?

Answer 1

but should show a thorough understanding of how a perfectly competitive firm finds the profit-maximizing level of output. For example, Hernandez Farms has entered the cotton business. It takes a while to get the first crop, so the first year shows a loss because total cost exceeds revenue, which is zero. Next year, the marginal revenue from the quantity produced exceeds the marginal cost enough to make up for last year’s loss and add a slight profit. In the following two years, the firm’s profit continues to increase as output increases because marginal revenue continues to exceed marginal cost. However, this difference is less with each succeeding year. Finally, in the fifth year, the firm’s marginal revenue equals its marginal cost. If the firm increases its cotton production more, it will start to lose profits. So in the fifth year, the firm has reached the profit-maximizing level of output.