Question

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its Question 6 options: 1) quantity of output is lower than it was previously. 2) average total cost is lower than it was previously. 3) marginal cost is higher than it was previously. 4) All of the above are correct.

Answer 1

Answer: 1) quantity of output is lower than it was previously.

Explanation:

In a competitive firm, the Price is the same as the Marginal Revenue and as this firm is maximising its profit, it is the same as Marginal cost as well.

If the price drops to $18, this would mean that the Marginal cost is now higher than the Marginal revenue which means that the company is making losses per every additional unit sold.

Company will respond by cutting production so that it can bring the marginal cost down to the Marginal revenue level thereby resulting in the quantity output being lower than it previously was.