A proﬁt-maximizing ﬁrm is producing an output of 300 units where price is £10 per unit and average total cost is £8 per unit. Given that the ﬁrm operates in a perfectly competitive market, which of the following is likely to be true?
A) The ﬁrm will stop production and exit the market.
B) The ﬁrm will sell each unit of the product at a higher price.
C) The market supply curve will shift to the right.
D) The existing ﬁrms will exit the industry.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if a firm is making a profit (as indicated by the price per unit being higher than the average total cost per unit), it signals to other potential firms that there are profits to be made in this market. This will likely attract new firms into the market, increasing the overall market supply, which is represented by a rightward shift in the market supply curve.

A Proﬁt-Maximizing ﬁRm Is Producing an Output of 300 Units