When the marginal cost of a price-taking firm is less than the market price of its product, what action should the firm take?

Question

Quizplus · Accepted Answer

When the marginal cost of a price-taking firm is less than the market price of its product, the firm should expand output, provided that price is not less than average variable cost. This is because, in this scenario, the firm can increase its profits by selling more units and earning a profit margin on each sale since the marginal cost of producing additional units is less than the market price. However, if the price falls below the average variable cost, the firm should reduce output or shut down to minimize losses. Charging more than the market price is not a viable option for a price-taking firm as it will lead to a loss of market share. Maintaining output may not be optimal if the firm can increase profits by expanding output.

When the Marginal Cost of a Price-Taking Firm Is Less