FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

-Refer to Figure 12- 1.Suppose each of Firms A,B and C are producing 500 kilos of potatoes.Keeping total output unchanged,what level of output should each firm be producing such that the industry is productively efficient?

Question

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.
 
-Refer to Figure 12- 1.Suppose each of Firms A,B and C are producing 500 kilos of potatoes.Keeping total output unchanged,what level of output should each firm be producing such that the industry is productively efficient?

Quizplus · Accepted Answer

In a perfectly competitive market, firms should produce at the point where their marginal cost equals the market price. Productive efficiency occurs when firms produce at the lowest possible cost, which is where the marginal cost curve intersects with the average total cost curve at its minimum point. In this case, the most efficient way to produce 1500 kilos of potatoes is for Firm A to produce 500 kilos (where MC=ATC at minimum point), for Firm B to produce 800 kilos (where MC=market price), and for Firm C to produce 200 kilos (where MC=ATC at minimum point). This way, each firm is producing at its lowest possible cost, and the industry is producing at the lowest possible cost as well. Therefore, the best choice is B.

FIGURE 12- 1 Consider Three Firms,A,B and C,all Producing Kilos