Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms. Firm A Cost MC 0 Quantity Firm B Cost MC 0 Quantity 24) Refer to the scenario above. If both the firms are optimizing, which of the following statements is true? A) Both firms will produce the same quantity. B) The quantity produced by both firms will depend on the demand for pens and not the marginal costs. C) Firm B will produce more than Firm A. D) Firm A will produce more than Firm B.
Added by James R.
Close
Step 1
They will produce at the level where their marginal cost (MC) equals the market price to maximize their profit. Given that the market price of one pen is $5, both firms will produce at the level where their MC is equal to $5. Since Firm A has a lower marginal Show more…
Show all steps
Your feedback will help us improve your experience
Akash M and 77 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
Explain why each of the following statements about profit-maximizing competitive firms is incorrect. Restate each one correctly. a. A competitive firm will produce output up to the point where price equals average variable cost. b. A firm's shutdown point comes where price is less than minimum average cost. c. A firm's supply curve depends only on its marginal cost. Any other cost concept is irrelevant for supply decisions. d. The $P=M C$ rule for competitive industries holds for upward-sloping, horizontal, and downward sloping MC curves. e. The competitive firm sets price equal to marginal cost.
Jennifer S.
Which of the following statements is true ? A. A firm should increase quantity as long as price is higher than average cost, regardless of the marginal cost B. A firm should increase quantity as long as price is greater than marginal cost C. A firm should increase quantity as long as average cost is greater than price D. A firm should increase quantity as long as marginal cost is greater than price
Nick J.
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD