Suppose you run a bakery in Omaha. Business is good, you always run out of bread

Question

Suppose you run a bakery in Omaha. Business is good, you always run out of bread each day (assume you have no market power -- that is, your supply has no influence on price). You've thrown more labor at the problem, but at this point they are getting in the way. You and your business partners are trying to decide how to meet demand. You have a number of options: the space next to you has been abandoned as well as the space across the street. The space across the street is less expensive. What would you do and why?

Explanation / Answer

Since the firm is operating in perfectly competitive market, the firm has no control over price of the product. Thus, to earn more and more profits, the firm should cut down on its cost. By cutting cost, the firm can earn profits in perfeclty competitive markets, Thus, it is best for the firm to select the space across the street which is less expensive as this will lead to reduction in total cost of the firm by reduction in total fixed cost.

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