A firm will always elect to reduce production when marginal cost is greater than average total cost if:
A) The firm is a price-taker and average total cost is maximum.
B) The firm is a price-setter and average total cost is maximum.
C) The firm is a price-taker and marginal cost exceeds the market price.
D) The firm is a price-setter and marginal revenue is greater than the market price.
E) None of these
Price-Setters vs. Price-Takers:
Price-setters (also called price-makers) and price-takers are more accurately called monopolies and competitive firms, respectively. Monopolies and competitive firms maximize profits by the same rule: marginal revenue and marginal cost must be equal. The only difference is that for monopolies, price should be greater than marginal revenue/marginal cost, and for competitive firms, price should be equal to marginal revenue/marginal cost.
Answer and Explanation: 1
The answer is C) The firm is a price-taker and marginal cost exceeds the market price.
First, the firm will continue production in the short run...
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fromChapter 3 / Lesson 62
Learn the definition, characteristics, and benefits of perfect competition. Review real-life examples of perfect competition between different companies.