A small island nation produces only boxes of macaroni and cheese, most of which it sells in the export market. The world price per box is $10, regardless of the quantity exported. The nation has three macaroni and cheese factories, each of which varies in efficiency, but it's impossible for the government to determine each factory's marginal cost. To profit the most as a country, what should this nation's government do?
A) Order each factory to produce the same quantity.
B) Shut down the two most inefficient factories and produce at the most efficient one until marginal cost is $10.
C) Let the producers compete in the market to determine the optimal quantity and allocation of macaroni and cheese production.
D) Impose a tax on exports and see which factory survives the longest.

Question

Quizplus · Accepted Answer

Letting the producers compete in the market and determine the optimal quantity and allocation of macaroni and cheese production would lead to the most efficient outcome. This is because the market forces of supply and demand would ensure that each factory produces at the level where their marginal cost equals the world price, maximizing the country's profits. Ordering each factory to produce the same quantity may not take into account their different levels of efficiency, and shutting down factories without knowing their marginal costs may result in loss of potential profits. Imposing a tax on exports would also not necessarily lead to the most efficient outcome and could potentially harm the industry as a whole.

A Small Island Nation Produces Only Boxes of Macaroni and Cheese