Consider the following cost curves for Firm X, a perfectly competitive firm. FIGURE 9-3
-Refer to Figure 9-3. If Firm X has a capital stock that generates SRATC1, then in the long run FirmX will have to
A) maintain its output level at Q₁, because it is maximizing its short-run profits.
B) set its output at Q₁ with an expanded plant size.
C) set its output at Q₁ with the existing plant size.
D) expand its output to Q₂ with the existing plant size.
E) either expand its plant size or exit from the industry.

Question

Consider the following cost curves for Firm X, a perfectly competitive firm.  FIGURE 9-3
-Refer to Figure 9-3. If Firm X has a capital stock that generates SRATC1, then in the long run FirmX will have to
A) maintain its output level at Q₁, because it is maximizing its short-run profits. 
B) set its output at Q₁ with an expanded plant size. 
C) set its output at Q₁ with the existing plant size. 
D) expand its output to Q₂ with the existing plant size. 
E) either expand its plant size or exit from the industry.

Quizplus · Accepted Answer

In the long run, firms aim to minimize costs and maximize profits. If Firm X is on SRATC1, it is not on the lowest possible cost curve (LRATC). Therefore, it must either expand its plant size to achieve lower costs or exit the industry if it cannot compete effectively.

Consider the Following Cost Curves for Firm X, a Perfectly