Jim\'s Burgers\' recent technological innovations have allowed them to reduce th
ID: 1134179 • Letter: J
Question
Jim's Burgers' recent technological innovations have allowed them to reduce the marginal cost of their burgers while the market price remained unchanged. Assume the market for burgers is perfectly competitive.
Which of the following statements are true:
Stores should produce more burgers, compared to before the technological innovations, to maximise their profit at the current market price.
A store should produce the same quantity of burgers as before the technological innovations.
A store should produce fewer burgers to avoid an increase in average variable costs.
A store should now produce more burgers and then sell them at a price lower than the market price
Stores should produce more burgers, compared to before the technological innovations, to maximise their profit at the current market price.
A store should produce the same quantity of burgers as before the technological innovations.
A store should produce fewer burgers to avoid an increase in average variable costs.
A store should now produce more burgers and then sell them at a price lower than the market price
Explanation / Answer
Answer
The correct answer is (a) Stores should produce more burgers, compared to before the technological innovations, to maximise their profit at the current market price.
A firm maximizes profit in a perfect competitive market when P = MC i.e. Price = Marginal Cost. Hence In order to maximize profit firm has to produce that quantity at which P = MC.Now Suppose improvement in Technology results in decrease in Marginal Cost. Hence as at every level of Q i.e. output MC decreases (i.e. MC curve move downwards) but Price remains constant. In order to satisfy profit Maximizing condition P = MC, firm has to produce more. As it is a perfect competitive market decrease in price of a good will result in an unnecessary loss. Hence he should sell at a current price.
Hence the correct answer is (a) Stores should produce more burgers, compared to before the technological innovations, to maximise their profit at the current market price.
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