Suppose a commodity is sold in perfectly competitive markets. If the market price of the commodity falls, each individual firm will produce ________ output and will experience ________ profits.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.ahigher; higherbhigher; lowerclower; higherdlower; lower
Question
Suppose a commodity is sold in perfectly competitive markets. If the market price of the commodity falls, each individual firm will produce ________ output and will experience ________ profits.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.ahigher; higherbhigher; lowerclower; higherdlower; lower
Solution
The correct answer is d) lower; lower.
Here's why:
In a perfectly competitive market, firms are price takers, meaning they have no control over the price of the commodity they sell. The price is determined by the overall supply and demand in the market.
If the market price of the commodity falls, it means that the demand for the commodity has decreased or the supply has increased. In either case, each individual firm will respond by producing less output to avoid accumulating unsold inventory.
As a result, the firm's total revenue (which is price times quantity sold) will decrease. Since costs do not decrease proportionally with the decrease in output (because of the presence of fixed costs), the firm's profits will also decrease. Hence, the firm will produce lower output and will experience lower profits.
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