Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production to lower average costs
B
Decrease production to raise prices
C
Maintain current production level as it maximizes profits
D
Increase prices to improve revenue
Understanding the Answer
Let's break down why this is correct
Answer
To maximize profits in a competitive market, the firm should consider adjusting its output level based on the price elasticity of demand. Since the price elasticity of demand is -1. 5, this means that demand is elastic, and a small decrease in price will lead to a larger increase in the quantity sold. Therefore, the firm could increase its output slightly, which would allow it to lower the price and attract more customers, ultimately leading to higher total revenue. For example, if the firm currently sells 100 units at a price of $10 each, producing and selling 110 units at a slightly lower price might increase overall profits despite the lower price per unit.
Detailed Explanation
When demand is elastic, lowering production can raise prices. Other options are incorrect because Some might think that producing more lowers costs; It's easy to think that staying the same is best.
Key Concepts
Price Elasticity of Demand
Competition
Output Level Optimization
Topic
Profit Maximization Techniques
Difficulty
hard level question
Cognitive Level
understand
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