Question

Show what happens to the firm's output choice and profit if the price of the product falls from $52 to $42. If the market price falls from $52 to $42, then the firm's output will decrease or increase from _____units to _____ units. (Enter your responses using integers.)

Answer 1

Answer: The firm's output will therefore decrease from 9 units to 8 units.

Step-by-step explanation:

This firm most likely operates in a competitive market where price is the same as marginal revenue.

In such a market, firms will try to maximize output by selling at a level where Price is equal to Marginal cost and if they cannot get here, they try to make them as close as possible so long as marginal cost does not exceed price.

As this is the case, when the price was $52, the closest Marginal cost that isn't higher than price was $45 for an output level of 9 units.

If the product falls to $42, the closest marginal cost that isn't higher than the cost is $38 for 8 units.

The firm's output will therefore decrease from 9 units to 8 units.