Part 1Why does a firm in perfect competition produce the quantity at which marginal cost equals price? Part 1In a perfectly competitive market, the price of a handsaw is $25. When a firm maximizes its profit, it produces 6 handsaws a day. Draw the marginal revenue curve. Label it. Draw the marginal cost curve that illustrates the profit-maximizing output. Label it. Draw a point at the profit-maximizing output and price. Click toenlargegraphPart 2A firm produces the quantity at which marginal cost equals price because when marginal cost is greater than price, the firm _______. A. can increase economic profit by producing 1 more handsaw B. is maximizing economic profit C. can increase economic profit by producing 1 less handsaw D. is at its shutdown point Part 1
024681005101520253035404550Quantity (handsaws per day)Price (dollars per handsaw)256 MCMC MRMR Edit coordinates interactive graph Draw only the objects specified in the question.

Question

Part 1Why does a firm in perfect competition produce the quantity at which marginal cost equals​ price? Part 1In a perfectly competitive​ market, the price of a handsaw is​ $25. When a firm maximizes its​ profit, it produces 6 handsaws a day. Draw the marginal revenue curve. Label it. Draw the marginal cost curve that illustrates the​ profit-maximizing output. Label it. Draw a point at the​ profit-maximizing output and price. Click toenlargegraphPart 2A firm produces the quantity at which marginal cost equals price because when marginal cost is greater than​ price, the firm​ _______. A. can increase economic profit by producing 1 more handsaw B. is maximizing economic profit C. can increase economic profit by producing 1 less handsaw D. is at its shutdown point Part 1
024681005101520253035404550Quantity (handsaws per day)Price (dollars per handsaw)256 MCMC MRMR Edit coordinates interactive graph​>>> Draw only the objects specified in the question.

BlackTom AI · Accepted Answer

Part 1: Restating the question and options clearly The question asks why a firm in perfect competition produces the quantity where marginal cost equals price, and presents a scenario with price = $25 and profit-maximizing output = 6 handsaws per day. It also asks, in Part 2, to identify what it means when marginal cost is greater than price. The answer choices are: A. can increase economic profit by producing 1 more handsaw B. is maximizing economic profit C. can increase economic profit by producing 1 less handsaw D. is at its shutdown point Analysis of each option Option A: “can increase economic profit by producing 1 more handsaw” - If marginal cost (MC) were less than price (P), producing one more unit would raise profit because the revenue gained from the extra unit (P) would exceed the cost of producing it (MC). However, the scenario specifies that the firm produces where MC = P. At MC < P, you would indeed gain from increasing output, but that situation does not hold at the profit-maximizing quantity. Since MC = P is the condition for profit maximization in perfect competition, once MC = P, moving to produce one more unit would yield MC > P, which would reduce profit. Therefore this option describes a situation before reaching profit maximization, not at the profit-maximizing point. Option B: “is maximizing economic profit” - In perfect competition, the profit-maximizing rule is to produce where MC = P, provided the firm covers its average variable costs in the short run. When MC = P, incremental profit from an extra unit is zero; any deviation typically reduces profit (or increases losses if MC rises above P). Saying “is maximizing economic profit” is only strictly accurate if the firm covers costs and is not forced to shut down; at the precise MC = P point, the marginal profit from the next unit is zero, but the overall profit is maximized with respect to output. However, the key dynamic statement to evaluate here is about what happens when MC exceeds P, which is addressed in Option C. This option is tapping into the broader idea that MC = P is the profit-maximizing condition, but the wording can be interpreted as asserting ongoing profit maximization at all times, which ignores the marginal change around the optimum. Option C: “can increase economic profit by producing 1 less handsaw” - When MC > P, producing an additional unit would cost more than the revenue it brings, so the firm would reduce profit by producing more. To restore or approach profit maximization, the firm should reduce output until MC falls back to P. If currently MC > P at the given output level, decreasing output by one unit would reduce costs more than revenue, thereby increasing profit. Therefore, in the region where MC exceeds price, cutting output by one unit tends to raise profit. This aligns with the standard profit-maximization rule: if MC > P, reduce output. Option D: “is at its shutdown point” - The shutdown condition occurs when price is less than average variable cost (P < AVC) in the short run. The information given (price = $25 and a profit-maximizing output of 6) does not indicate that price is below AVC. In fact, if MC = P at the profit-maximizing quantity, the firm is typically covering variable costs at that output level. Being at the shutdown point would mean the firm would rather temporarily stop producing, which is not implied by MC = P. Thus this statement does not correctly describe the situation when MC > P and is not consistent with the given scenario. Additional clarity on the core concept - The standard reasoning in perfectly competitive markets is: produce where MC = P, as long as you cover variable costs. If MC exceeds price, each additional unit adds more cost than revenue, so marginal profit is negative and it would be optimal to reduce output. If MC were less than price, increasing output would raise profit until MC rises to meet P. If MC equals P, you are at the profit-maximizing output (in the usual short-run framework). Summary of the reasoning for each option - A: Not correct at the profit-maximizing output because MC = P; producing one more unit would have MC > P, reducing profit. - B: While MC = P is the condition associated with profit maximization in perfect competition, this option’s wording suggests ongoing maximum profit regardless of marginal changes; it’s a nuanced interpretation but does not precisely describe the given condition where MC > P would imply not maximizing by producing more. It is therefore questionable as a complete description of the situation. - C: Correct interpretation of MC > P: reducing output by one unit (producing 1 less) tends to increase profit because the extra unit’s cost would exceed its revenue, so lowering output moves toward the profit-maximizing level. - D: Not supported by the information provided; being at the shutdown point requires P < AVC, which is not indicated here. In summary, the key concept is that when marginal cost is greater than price, the firm should reduce output to increase profit, which is what option C describes. The other options either misstate the behavior around the profit-maximizing quantity or describe conditions (like shutdown) not implied by the given data.

Homework:ch12_qz2

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