Question

​Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of pizza cheese​ increases, ceteris paribus​, what is the expected impact on​ Ronny's profit-maximizing output​ decision? A. Output decreases because the marginal cost curve shifts upward. B. Output increases to cover the higher input cost. C. Output increases because the marginal cost curve shifts upward. D. Output decreases because the price of pizza must also increase.

Answer 1

Answer:

Option (A) is correct.

Explanation:

A particular profit maximizing firm is produces at a point where marginal cost is equal to the marginal revenue.

Pizza cheese is used as an input for producing pizza, so if there is an increase  in the price of pizza cheese then this will results in an increase in the cost of production for the Ronny's Pizza House and this change will shift the marginal cost curve upwards.

We know that marginal revenue curve is downward sloping and marginal cost curve is upward sloping, so if there is a upward shift in the MC curve then it cuts the marginal revenue curve at a lower level of output.