Suppose farmer lane grows and sells cotton in a perfectly competitive industry. the market price of cotton is $1.64 per kilogram, and his marginal cost of production is $1.44 per kilogram, which increases with output. assume farmer lane is currently earning a profit. can farmer lane do anything to increase his profit in the short run? farmer lane: a. cannot do anything to increase his profit. b. may or may not be able to increase his profit. c. can increase his profit by raising his price. d. can increase his profit by producing more output. e. can increase his profit by shutting down.
B. In the short run, the typical firm increases its output and makes an above normal profit.
I have attached a graph to explain.
Originally the Perfectly Competitive Market is in a long run Equilibrium.
This means that at 5000 units the $20 selling price was as a result of Marginal Revenue being equal to Marginal Cost.
Now a sudden change in Demand has taken the price up which then forces the Marginal Revenue Curve upwards.
This will culminate with the Marginal Revenue Curve now intersecting the Marginal Cost curve at a higher point being point F so that profit can be maximised.
This higher level will thus lead to a higher output than 5000 units at point Q as the firm will increase output.
Notice that at that point the Marginal Revenue is higher than Average Total Cost meaning that an Above normal profit is being made.
Do react or comment if you need any clarification.
Option (C) is correct.
In a competitive market conditions, there are large number of buyers and sellers. All the firms in this market condition are selling identical products or we can say that all the goods are perfect substitutes.
Suppose if the firms earning negative economic profit then they continue to operate until the price of their goods is greater than the average variable cost and they shut down their production if the price of their goods is lower than the average variable cost.
A firm can experience normal profit, loss or supernormal in the short run.
But competitive firms cannot decreases their output to minimizes their losses.
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