QUESTION 6 How can the market mechanism guarantee that the marginal cost of prod
ID: 1161617 • Letter: Q
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QUESTION 6 How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those ftirms have different owners, are in different locations, and have unique cost functions known only to the firms themselves? Why don't these different firms need to have one shared owner or one shared manager to coordinate this requal marginal cost" condition? Assume the market is perfectly competitive A in a free market, each firm owner has an incentive to choose the level of output that maximizes marginal cost B in a free market. each firm owner has an incentive to choose the level of output such that price is less than marginal cost marginal cost marginal cost C in a free market each firm owner has an incentive to choose the level of output such that price is greater than D in a tree market each firm owner nas an incentive to choose the level of output such that price equalsExplanation / Answer
Answer: In a free market, each firm has an incentive to choose the level of output such that price is greater than marginal cost.
Explanation: The production capacities and costs incurred by different firms may differ from one another depending on the size and scale of the firm. This means that their pricing would vary as well. In a perfectly competitive market, however, too much variation in price among firms would could be disadvantageous to some firms. This means that if firm A reduces its price beyond a certain limit to compete with firm B, it would get more customers but would incur losses due to low pricing. On the other hand if the pricing is too high it would incur losses as there would be only a few buyers or none. Hence, there needs to be a certain price level at which each firm operates in a perfectly competitive market. Firms achieve this by maintaining equal marginal costs by making adjustments to their factor input costs and the quantity of output so as to sustain in the free market. Thus, every firm has an incentive to choose the level of output such that price is greater than marginal cost.
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