1. A competitive firm operating in the short run is producing at the output leve
ID: 1202333 • Letter: 1
Question
1. A competitive firm operating in the short run is producing at the output level at which ATC is at a minimum. If ATC = $8 and MR = $9, in order to maximize profits (or minimize losses), this firm should:
a) reduce output.
b) increase output.
c) shut down.
d) do nothing; the firm is already maximizing profits.
Why is the answer b? Wouldn't increasing output increase the atc which will reduce the profits since atc is at the minimum at the current output?
2. Zoe's Bakery operates in a perfectly competitive industry. The variable costs at Zoe's Bakery increase, so all of the cost curves (with the exception of fixed cost) shift leftward. The demand for Zoe's pastries does not change, nor does the firm shut down. To maximize profits after the variable cost increase, Zoe's Bakery will ________ its price and ________ its level of production.
a) raise; increase
b) decrease; increase
c) raise; decrease
d) do nothing to; decrease
Why is the answer d?
3. The equilibrium price of a guidebook is $35 in the perfectly competitive guidebook industry. Our firm produces 10,000 guidebooks for an average total cost of $38, marginal cost of $30, and average variable cost of $30. Our firm should:
a) raise the price of guidebooks, because the firm is losing money.
b) keep output the same, because the firm is producing at minimum average variable cost.
c) shut down, because the firm is losing money.
d) produce more guidebooks, because the next guidebook produced increases profit by $5.
Why is the answer d? It the atc is higher than the price you will lose money not make a profit.
Explanation / Answer
2. d) do nothing to; decrease
Under perfect competition firm cannot change its price because they are price takers. Secondly, perfectly competitive firm can reduce its loss by reducing its production.
3. d) produce more guidebooks, because the next guidebook produced increases profit by $5.
To attain maximum profit firm should produce output where MR = MC. In the above scenario, MR i.e. price is greater than the MC, it means firm is earning profit. If firm increases its output by 1 unit then profit of the firm will increase but if profit of the firm can increase by increasing 1 unit then, it means firm is not at its maximum profit level. So, firm produces at that level of output where firms MR = MC.
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