In the short run, how will a decrease in variable costs affect the output of a typical firm in a competitive market?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aAn increase in outputbA decrease in outputcNo change in outputdCannot tell
Question
In the short run, how will a decrease in variable costs affect the output of a typical firm in a competitive market?Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aAn increase in outputbA decrease in outputcNo change in outputdCannot tell
Solution
aAn increase in output
Here's the step by step explanation:
- Variable costs are costs that change with the level of output, such as raw materials, labor, etc.
- If variable costs decrease, it means the cost of producing each unit of output decreases.
- In a competitive market, firms are price takers and will produce where marginal cost equals marginal revenue.
- If the marginal cost decreases (due to a decrease in variable costs), the firm will increase output until the new, lower marginal cost equals the marginal revenue.
- Therefore, a decrease in variable costs will lead to an increase in output in the short run.
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