Question

A perfectly competitive firm produces at an output at which marginal revenue is less than marginal cost. To maximize profit, the firm should: multiple choice 1 produce more. maintain its level of output. produce less. If the price of output decreases, the firm's optimal level of output will (Click to select) .

Answer 1

A perfectly competitive firm should produce less to maximize profit when marginal revenue is less than marginal cost; with a decrease in price, the optimal level of output will also decrease.

Step-by-step explanation:

In a perfectly competitive market, a firm finds its profit-maximizing level of output where marginal revenue (MR) is equal to marginal cost (MC). If a firm is producing output where MR is less than MC, it should produce less to increase its profits. Reducing output would continue until MR equals MC.

If the price of output decreases, this would mean the MR has also decreased since, in perfect competition, MR equals price. As a result, the firm's optimal level of output would decrease as well to maintain the condition where MR equals MC.

Answer 2

To maximize profit when marginal revenue is less than marginal cost in a perfectly competitive market, the firm should produce less.

Step-by-step explanation:

In a perfectly competitive market, a firm maximizes profit by producing at the output level where marginal cost equals marginal revenue. When marginal revenue is less than marginal cost, reducing output is advisable to move towards the profit-maximizing equilibrium. Producing less ensures that the additional cost incurred (marginal cost) is lower than the revenue generated (marginal revenue), aligning with profit maximization principles.

If the price of output decreases, the firm's optimal level of output will decrease as well. In a perfectly competitive market, the price is equal to marginal revenue, and a decrease in price would mean a decrease in marginal revenue. To maintain profit maximization, the firm adjusts its output level to reflect the lower marginal revenue associated with the decreased price.