Answer to Question #227722 in Microeconomics for Lebogang

Question

In a perfect competitive industry, the market price is R20. An individual firm produces output at which MC=R25. What should the firm do to maximise profits or to minimise losses in the short run?
A. they should leave the output unchanged.
B. they should increse production.
C. they should decrease production.
D. they should shut down.

Answer 1

Answer: C (they should decrease production)

Explanation:

The price is less than the marginal cost when the output is greater than the equilibrium output. So the firm will decrease the output. As a result, the MC will decrease and it will become equal to the price and equilibrium will be restored.

Note:

Graphically the situation of MC>P occurs in the initial stage and the later stage. If we consider the MC>P at the initial stage of production (at point A) then the output should increase. But if we consider the MC>P at the later stage (after the equilibrium point at point B) of production then the output should decrease. I have considered that MC>P and output is beyond the equilibrium level of output.

Answer: Option C