Omar is a potato farmer and the worldp ato market is perfectly competitive The m

Question

Omar is a potato farmer and the worldp ato market is perfectly competitive The market price is $16 a basket. Omar sells 1,200 baskets a week and his marginal cost is $21 a basket. The market price falls to $10 a basket, and Omar cuts his output to 750 baskets a week. Omar's average variable cost and marginal cost fall to $10 a bask . Omar is 0 A. maximizing profit and he is making an economic profit 0 B, not maximizing profit because he has cut his potato production O c. not maximizing profit because marginal revenue does not equal marginal cost 0 D. not maximizing profit because he is incurring an economic loss O E. maximizing profit and he is incurring an economic loss

Explanation / Answer

Since now the market price has fallen from $16 to $10 and current AVC is $10 and current MC is also $10.

It means perfect competition profit-maximising condition is satisfied now because the price is equal to the MC.

But as it can be seen in the question that ;

Price=MC=AVC,

It is shut down condition also because, at this level of output, the firm is indifferent between operate or shut down because this firm is able to cover just variable cost and firm is incurring an economic loss equal to the total fixed cost.

It means the perfectly competitive firm is not able to maximise its profit because it is incurring an economic loss equal to the total fixed cost.

Hence option D is the correct answer.

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.