Claude's Copper Clappers sells clappers for $40 each in a competitive price-taker market. At its present rate of output, Claude's marginal cost is $39, average variable cost is $25, and average total cost is $45. To improve his profit/loss situation, Claude should
A) increase output
B) reduce output but not to zero
C) maintain the present rate of output
D) shut down
E) raise the price

Question

Quizplus · Accepted Answer

Claude is currently producing at a point where marginal revenue (which is equal to the selling price of $40 in a competitive market) is greater than marginal cost of production, which is $39. Thus, producing more will increase his profits by $1 for each additional unit produced. Moreover, since average variable cost is less than the selling price, he is covering his variable costs and some part of fixed costs. Therefore, increasing output will lead to a higher contribution towards covering the fixed costs, which will further improve the profit/loss situation of Claude.

Claude's Copper Clappers Sells Clappers for $40 Each in a Competitive