Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, marginal cost exceeds this firmʹs price. Assuming price exceeds average variable cost, to maximize profits Cathy's should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if marginal cost exceeds the price, the firm should decrease its output to maximize profits, as long as the price is above the average variable cost. This adjustment helps the firm to align its production with the point where marginal cost equals the price, which is the profit-maximizing condition in perfect competition.

Assume Cathy's Cupcake Company Operates in a Perfectly Competitive Market