Question

ATC AVC 60 80 100 Figure 9.2 Figure 9.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the current market price is $10 and the firm produces the profit maximizing output level. If the firm's total fixed cost increases due to a new government regulation, the short-run response of the firm should be to: Note: since the question does not restrict the firm's response to the short run, we can't rule out that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit the industry in the long run, thus decreasing its current output level. O produce its current output level. increase its current output level. decrease its current output level. There isn't sufficient information.

Answer 1

Since the profit maximizing condition of the perfectly competitive firm is

P=MC

As it has been given that Price is $10, So corresponding to this condition quantity is 100 units, ATC is $8.

Since price is greater than ATC, so firm earn economic profit.

But when the firm increases, its fixed cost, then break-even point decreases, so profit will also decreases. But firm profit-maximizing condition will not change, so firm continue to operate at the current level of output and positive economic profit. Until firm earn positive economic profit, firm does not shut-down.

Hence option first is the correct answer.