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 firms operate without government intervention,________.

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 firms operate without government intervention,________.

Quizplus · Accepted Answer

Given that Firm A has a lower marginal cost than Firm B, it can produce the same pen for a lower cost. Therefore, it can sell the pen at a lower price and still make a profit. In a perfectly competitive market, both firms will continue to produce until their marginal cost equals the market price of $5. However, since Firm A has a lower marginal cost, it will have a higher profit margin than Firm B, leading to total profits being maximized. So, without government intervention, total profits will be maximized.

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