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.Which of the following statements is true?
A) If the production of both firms is equal, social surplus increases.
B) No government intervention is required to reach the optimal outcome.
C) At the optimal level of production, total costs of production are maximized.
D) Even though both firms have different marginal costs, the optimal quantity produced will be the same for both firms.

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.Which of the following statements is true?
A) If the production of both firms is equal, social surplus increases. 
B) No government intervention is required to reach the optimal outcome. 
C) At the optimal level of production, total costs of production are maximized. 
D) Even though both firms have different marginal costs, the optimal quantity produced will be the same for both firms.

Quizplus · Accepted Answer

In a perfectly competitive market, firms will produce at the point where marginal cost equals price in order to maximize profits. Firm A will produce at a lower cost than firm B, but both will produce at the same quantity where MC=MR, because they are price takers in a perfectly competitive market. Since the market price is $5, both firms will produce the same quantity, and no government intervention is required to reach the optimal outcome. Choice A is incorrect because social surplus does not increase if the production of both firms is equal, but rather consumer surplus and producer surplus are maximized. Choice C is incorrect because the optimal level of production occurs where marginal cost equals marginal revenue, not where total costs are maximized. Choice D is incorrect, as explained above, because both firms will produce the same quantity at the point where MC=MR.

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