Question

As the market price decreases, all else held constant, a profit maximizing firm will ____________ its production?

1) increase
2) decrease
3) maintain
4) cannot be determined

Answer 1

A profit-maximizing firm will decrease its production when the market price decreases, to ensure that its marginal revenue remains equal to its marginal cost, thereby maximizing profits.

Step-by-step explanation:

As the market price decreases, all else held constant, a profit-maximizing firm will decrease its production. This is because when the market price decreases, the marginal revenue the firm receives from producing an additional unit also decreases. If the price falls below the marginal cost of production, the firm will not cover the costs of producing that unit, and its profits for every additional unit it produces will go down. Therefore, the firm will reduce production until marginal revenue equals marginal cost (MR = MC), which is the point of profit maximization. This correlates with the individual supply curve shifting to the left, representing a decrease in quantity supplied at every price level.