Consider a perfectly competitive firm in the following position: output = 4000 units, market price =
$1, fixed costs = $2000, variable costs = $2000, and marginal cost = $1. To maximize profits the firm should
A) shut down.
B) not change its output.
C) expand its output.
D) increase the market price.
E) reduce its output.

Question

Quizplus · Accepted Answer

The firm should continue producing at its current output because its marginal cost ($1) is equal to the market price ($1), indicating that it is earning zero economic profit. If the firm were to shut down, it would incur a loss equal to its fixed costs ($2000). If it were to expand output or reduce output, it would incur additional costs and earn less revenue or lose sales respectively, resulting in a reduction in profit. Therefore, maintaining its current output is the best choice for the firm in this situation.

Consider a Perfectly Competitive Firm in the Following Position: Output