Question

A perfectly competitive firm finds that for the last shirt that it produces and sells, the marginal revenue is 20
and the marginal cost is 22
. The firm should


charge
to maximize profit


a

produce more shirts to increase profit


b

produce fewer shirts to increase profit


c

hire more workers to increase production


d

shut down if the average variable cost is less than

Answer 1

Answer: b — produce fewer shirts to increase profit.

Explanation: In perfect competition MR = price and profit is maximized where MR = MC. Here MR (20) < MC (22), so the last unit reduces profit; the firm should cut output until MR = MC.