Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm can increase output without changing price.
B
The firm must lower its price to sell more.
C
The firm's profits will decrease as output increases.
D
The firm will face increased competition immediately.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm reduces its marginal cost because of new technology, it can produce goods more cheaply. In a perfectly competitive market, this means the firm can lower its prices to attract more customers, since many firms sell similar products. As the firm lowers its prices, it may increase its production level because it can sell more at the lower price. For example, if a bakery improves its oven technology and can bake bread at a lower cost, it might reduce the price of a loaf of bread to sell more. Overall, this change benefits consumers with lower prices and encourages the firm to produce more.
Detailed Explanation
When a firm lowers its marginal cost, it can produce more goods without raising prices. Other options are incorrect because Some might think that lowering costs means the firm must drop prices to sell more; It's a common mistake to think that increasing output always lowers profits.
Key Concepts
Marginal cost reduction
Perfect competition
Output and pricing strategies
Topic
Cost Changes and Production Levels
Difficulty
medium level question
Cognitive Level
understand
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