Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms. FIGURE 12-1
-Refer to Figure 12-1.Suppose each of Firms A,B and C are producing 500 kilos of potatoes.Keeping total output unchanged,what level of output should each firm be producing such that the industry is productively efficient?
A)Firm A: 200 kilos,Firm B: 500 kilos,Firm C: 800 kilos
B)Firm A: 700 kilos,Firm B: 800 kilos,Firm C: 0 kilos
C)Firm A: 500 kilos,Firm B: 800 kilos,Firm C: 200 kilos
D)Firm A: 500 kilos,Firm B: 500 kilos,Firm C: 500 kilos
E)Firm A: 500 kilos,Firm B: 200 kilos,Firm C: 200 kilos

Question

Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.  FIGURE 12-1
-Refer to Figure 12-1.Suppose each of Firms A,B and C are producing 500 kilos of potatoes.Keeping total output unchanged,what level of output should each firm be producing such that the industry is productively efficient?
A)Firm A: 200 kilos,Firm B: 500 kilos,Firm C: 800 kilos 
B)Firm A: 700 kilos,Firm B: 800 kilos,Firm C: 0 kilos 
C)Firm A: 500 kilos,Firm B: 800 kilos,Firm C: 200 kilos 
D)Firm A: 500 kilos,Firm B: 500 kilos,Firm C: 500 kilos 
E)Firm A: 500 kilos,Firm B: 200 kilos,Firm C: 200 kilos

Quizplus · Accepted Answer

In a perfectly competitive market, firms produce where marginal cost equals price. For productively efficient outcome, firms should produce where the marginal cost is equal throughout the industry. Looking at the graphs, this happens at the intersection of the marginal cost curves of firms B and C, which is at 800 kilos of output. Firm A should produce where its marginal cost intersects with that same quantity of output (800 kilos), which is at 200 kilos of output. Therefore, the industry would be productively efficient if Firm A produces 200 kilos, Firm B produces 800 kilos, and Firm C produces 200 kilos, for a total industry output of 1200 kilos. Hence, the answer is C.

Consider Three Firms,A,B and C,all Producing Kilos of Potatoes (Per