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21 December, 11:42

onsider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm a. could increase profits by reducing output from 300 units. b. could increase profits by increasing output from 300 units. c. should decide to increase the price above $20. d. should shut down, since it must be losing money.

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  1. 21 December, 11:58
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    The best option is (d). should shut down, since it must be losing money

    Explanation:

    Step 1: Calculate the total revenue from sales

    Total revenue from sales=price per unit*number of units

    where;

    price per unit=$20

    number of units=300

    replacing;

    Total revenue = (20*300) = $6,000

    Step 2: Total cost from marginal cost

    The marginal cost is the change in total production cost caused by increasing a unit in production.

    Total marginal cost = (20*300) + (22*1) = $6,022

    Step 3: net profit

    net profit=total revenue-total marginal cost

    where;

    total revenue=$6,000

    total marginal cost=$6,022

    replacing;

    profit = (6,000-6,022) = -$22

    This means production of additional units increases the production cost and thus reducing the profits too.
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