Question

Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Suppose the prevailing market price for this firm's product is $0.14 and the firm is currently producing 20 units of output. This competitive firm wishing to maximize its profit would Output per period TVC (S) TFC (S) 0 0 10 25 20 30 6 5 40 10 5 50 15 3. Increase output because marginal revenue is greater than marginal cost b. produce zero output because price is less than the minimum average variable cost C. decrease output because marginal revenue is less than marginal cost d. decrease output because marginal revenue is greater than marginal cost e increase output because marginal revenue is less than marginal cost

Answer 1

Output	TVC ($)	TFC ($)	TC ($)	MC ($)	MR($)
0	0	5	5
10	2	5	7	0.2	0.14
20	3	5	8	0.1	0.14
30	6	5	11	0.3	0.14
40	10	5	15	0.4	0.14
50	15	5	20	0.5	0.14

MC = Change in TC / Change in Output.

In perfect competition, price = marginal revenue

hence, MR = $0.14 at each level of output.

A perfectly competitive firm produces at P = MC

or, MR = MC (because P = MR)

The firm is currently producing20 units of output. At this level of output, MR and MC are not equal.

Hence at 20 units of output, marginal revenue is greater than the marginal cost.

So, in order to maximize profit firm should increase production so that MC increases. And this process will continue until MR = MC attain.

Answer: Option (A)