What would happen to the profit maximizing level of output if the market price suddenly rose to $54 per case? Explain why the output level changes.
To determine the impact of a sudden increase in market price on the profit-maximizing level of output, we need to consider the concept of marginal cost and marginal revenue.
Marginal cost refers to the additional cost incurred from producing one more unit of output, while marginal revenue represents the change in revenue resulting from selling an additional unit of output. In order to maximize profits, a firm will generally continue increasing output as long as marginal revenue exceeds marginal cost, up to a certain threshold.
Now, let's consider the situation where the market price suddenly rises to $54 per case. To determine the impact on the profit-maximizing level of output, we need to compare this new market price with the marginal cost.
If the market price surpasses the current marginal cost of production, the firm will increase its output level because producing more units will generate additional profit. However, if the market price is below the marginal cost, the firm will decrease its output level since the cost of production exceeds the potential revenue.
So, to assess the impact of the price increase on the profit-maximizing level of output, we need to compare the new price of $54 per case with the current marginal cost. If the new price is higher than the marginal cost, the firm should increase its output level as this will result in additional profit. Conversely, if the new price is lower than the marginal cost, the firm would decrease its output level to avoid incurring losses.
In summary, a sudden increase in market price to $54 per case would likely increase the profit-maximizing level of output if the new price exceeds the current marginal cost. However, a decrease or no change in output would occur if the marginal cost surpasses the new market price.