Question:
If one firm in a perfectly competitive industry experiences a technological breakthrough that lowers only that firm’s cost of production, which describes the effect on this firm’s price, output and profit?
(1) Dec / Dec / Dec
(2) Dec / Inc / Inc
(3) No change / Dec / Inc
(4) No change / Inc / Inc
(5) Inc / Inc / Inc
Correct Answer:
(4)
Answer Explanation:
In perfect competition, an individual firm is a “price taker,” meaning it cannot change the market price, so its price remains unchanged. The lower costs shift its Marginal Cost (MC) curve downward. To maximize profit (where P = MC), the firm will increase its output. Higher output at lower costs guarantees an increase in profit.
Topic: Firm Theory Year: 2019
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