A firm producing good Y recently increased monthly production from 1,500 units t
ID: 1107784 • Letter: A
Question
A firm producing good Y recently increased monthly production from 1,500 units to 2,000 units. This had no impact on the market price of good Y. At the new production level of 2,000 units, the firm's average cost is $3.5 while its marginal cost of production is $4. The marginal revenue however is fixed at $5 for all levels of output. Jake Williamson is the operations head of the firm. Jake feels that, since the firm has the capacity, it should have increased production further to 2,500 units which would have maximized profits. On the other hand, Mathew Hayden of the market research team anticipates an increase in price to $5.5 in the near future. He therefore claims that the firm may not be maximizing economic profit in the short run even at 2,500 units. Mathew is assuming that: 0 A, no new firms enter the market in the short run. 0 B. at the production level of 2,500 units marginal cost will equal the market price. O C. this firm caters to the entire market for Y 0 D. the firm is currently operating at the minimum point of its marginal cost curve. O E. the market demand for Y is highly price elastic.Explanation / Answer
At the current quantity of 1500 units the firm has a marginal cost of production which is lower than the price prevailing in the market. We are also given the information that increased production does not increase the market supply and the market price which means the firm operates in a competitive industry. Since marginal cost is less than the marginal revenue which is fixed at $5 it means that the firm can increase production and can increase its profit.
In this sense Jake is correct. Given that Matthew is expecting the price to be increase in the near future and firm is not maximizing economic profit in the short run. It means that make you must be assuming option A to be true.
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