Question

Catering, Inc., which provides catering services in a perfectly competitive market, was maximizing profits at the market price of $22 per meal. The market price has recently increased to $28 per meal. Which of the following short-run adjustments will increase profits for Catering, Inc.?
(A) Increasing output until the marginal cost equals the new price
(B) Increasing output until the average total cost equals the new price
(C) Decreasing output because of the increase in market price
(D) Increasing the wage rate paid to its workers
(E) Increasing advertising to increase demand for the meals MRZMC=P

Answer 1

Answer:

  (A) Increasing output until the marginal cost equals the new price

Explanation:

Profit is maximized when marginal profit is zero, which is to say when the revenue from the sale of the next item is equal to its cost of production.

If the price is set higher by the marketplace, then increasing the volume of units produced will increase profit, up to the point where marginal cost is equal to the market price.