Question

A perfectly competitive firm has the following cost schedule

Output (units)	0	1	2	3	4	5	6	7	8	9	10
MC(Rs.)	-	11	10	9	8	7	6	5	7	13	19
TC(Rs.)	9	20	30	39	47	54	60	65	72	85	104

Suppose the price falls to Rs. 7, the firm would choose to produce ________ of output.

• A. 5 units
• B. 6 units
• C. 7 units
• D. 8 units

Answer 1

Answer: (D)

8 units

Since the market is perfectly competitive, the firm will produce that the point where MR = MC, and the market demand curve represents P=AR=MR

Given that AR (price) = 7, the firm will choose to produce at a point where MC = 7.

This occurs at two levels of output 5 and 8. The producer will produce at output level 8, as this generates a higher total revenue than producing at output level 5.