Question

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.

Answer 1

Answer:

d) produce more guidebooks, because the next guidebook produced increases profit by $5.

Explanation:

A perfectly competitive industry is characterised by many buyers and sellers of homogenous goods and services. There are no barriers to entry or exit of firms. In the long run, firms earn zero economic profit.

Profit is maximised where marginal revenue/ price is equal to marginal cost.

In this question, marginal revenue ($35) is greater than marginal cost ($30), so, the firm isn't maximising profit and they should increase production.

A firm should shutdown when average variable cost is greater than price.

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