Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm will decrease its output to maximize profits.
B
The firm will increase its output to take advantage of higher prices.
C
The firm will maintain its current output level since it is a price taker.
D
The firm will exit the market immediately.
Understanding the Answer
Let's break down why this is correct
Answer
When a perfectly competitive firm faces a decrease in market price, it will likely reduce its output level. This is because, in perfect competition, firms are price takers and cannot influence the market price. If the price drops below the firm's average total cost, it may not be able to cover its costs, leading to losses. For example, if a bakery sells bread for $3 per loaf but the market price falls to $2, the bakery might decide to bake fewer loaves to minimize losses. Ultimately, the firm will adjust its production to match the new market conditions and maximize its profit or minimize its losses.
Detailed Explanation
When the market price drops, the firm earns less money for each item sold. Other options are incorrect because This answer suggests the firm should produce more when prices are high; This answer assumes the firm can keep producing the same amount regardless of price.
Key Concepts
Perfect Competition
Market Equilibrium
Profit Maximization
Topic
Perfect Competition and Market Equilibrium
Difficulty
easy level question
Cognitive Level
understand
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