Assume Cathy's Cupcake Company Operates in a Perfectly Competitive Market

question 11

Multiple Choice

Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price equals this firmʹs marginal cost. Assuming price exceeds average variable cost, to maximize profits Cathy's should

• A) make no adjustments as they are already maximizing their profits.
• B) increase their output.
• C) decrease their output.
• D) stop producing since it is earning a loss.

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Definitions:

Income Effect

The change in an individual's or economy's consumption patterns due to a change in real income, reflecting how increases or decreases in income can affect buying habits.

Substitution Effect

The alteration in purchasing behavior caused by variations in the relative costs of products, prompting buyers to opt for less expensive alternatives over pricier ones.

Price Change

An adjustment in the cost of a good or service in the market, which can be an increase or decrease due to various factors.

Income

The remuneration accrued, notably in a recurrent manner, from labor or the investment of resources.