Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production of the good as long as the marginal cost is less than the new price.
B
Decrease production of the good because higher prices always lead to lower demand.
C
Maintain the same level of production since the price change does not affect marginal cost.
D
Shift resources away from production of the good towards another good with stable prices.
Understanding the Answer
Let's break down why this is correct
Answer
When the price of a good increases in a competitive market, a firm should look to adjust how it uses its resources to make more of that good. This means the firm needs to consider the marginal cost, which is the cost of producing one more unit, and how sensitive the demand is to changes in price, known as price elasticity. If the demand for the good is elastic, meaning consumers will buy significantly less if the price goes up, the firm might want to be careful about producing too much. For example, if a bakery sees the price of cupcakes rise, it could decide to allocate more flour and labor to make cupcakes instead of cookies, as long as the cost of making more cupcakes is less than the additional revenue from selling them. This way, the firm can optimize production and maximize profits by responding wisely to price changes.
Detailed Explanation
When the price goes up, it usually means people are willing to pay more. Other options are incorrect because This answer assumes that higher prices always mean people will buy less; This option suggests that price changes don't matter for production levels.
Key Concepts
Marginal cost
Price elasticity
Resource allocation
Topic
Production Possibilities and Price Effects
Difficulty
hard level question
Cognitive Level
understand
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