Question

Suppose abc corp. is a firm producing newsprint in a perfectly competitive industry. its output is 1500 tonnes per month, the marginal cost of the last tonne produced is $710, and the average revenue per tonne is $620. in the short run, this firm should:

a) the price of the product is not known, so it is not possible to determine.
b) reduce output.
c) increase output until marginal revenue is equal to marginal cost.
d) increase output until average revenue is equal to marginal cost.
e) definitely shut down

Answer 1

ABC Corp. should reduce its output since the average revenue per tonne is less than the marginal cost of the last tonne produced, indicating that the last unit is decreasing profits.

Step-by-step explanation:

If ABC Corp. is producing newsprint in a perfectly competitive industry at an output of 1500 tonnes per month with a marginal cost of $710 for the last tonne produced, and an average revenue per tonne of $620, then in the short run, this firm should consider its options based on the relationship between marginal cost, average revenue, and the price of the product.

Given that the average revenue, which is the same as the market price in perfect competition, is less than the marginal cost, it indicates that producing the last unit has added more to costs than to revenues. Therefore, the marginal unit is reducing profits, suggesting that the firm should reduce output. This strategy is aligned with the objective of a firm in perfect competition to produce at a level where marginal cost equals marginal revenue, which is the same as the price in such markets.