Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Reduce output until marginal cost equals market price
B
Increase output to maximize revenue
C
Maintain current output to secure market share
D
Exit the market immediately
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, if a firm's marginal cost is higher than the market price, it means that producing one more unit of the product will cost more than what it can sell it for. To maximize profit, the firm should reduce its production because producing more would lead to losses. For example, if a firm is making toys and it costs $10 to make one more toy, but it can only sell it for $8, it should stop making that extra toy. By cutting back on production, the firm can focus on making enough toys where the marginal cost is equal to or less than the market price, ensuring that it does not lose money. This way, the firm can operate more efficiently and protect its profits.
Detailed Explanation
When a firm's cost to produce one more unit is higher than what they can sell it for, they lose money. Other options are incorrect because Some might think that making more products will always bring in more money; Maintaining the same output might seem safe, but if costs are too high, the firm will keep losing money.
Key Concepts
Profit Maximization in Perfect Competition
Marginal Cost and Market Price Relationship
Market Entry and Exit Decisions
Topic
Market Structures and Profit Maximization
Difficulty
medium level question
Cognitive Level
understand
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