Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms.

-Refer to the scenario above.If both the firms are optimizing,which of the following statements is true?

Question

Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms.
 
-Refer to the scenario above.If both the firms are optimizing,which of the following statements is true?

Quizplus · Accepted Answer

In a perfectly competitive market, firms produce at the point where marginal cost equals price. As firm A has a lower marginal cost, it will have a lower average total cost, and thus, it will be able to produce at a lower price than Firm B. Therefore, Firm A will have a greater incentive to produce more, and it will do so until marginal cost equals the market price. On the other hand, Firm B will produce only up to the point where its marginal cost equals the market price. Since its marginal cost is higher than Firm A's, Firm B will produce a lower quantity than Firm A. Therefore, Firm A will produce more than Firm B.

Scenario: There Are Two Firms Producing Ballpoint Pens in a Perfectly