(Figure: Costs and Profits for Tomato Producers) Use Figure: Costs and Profits for Tomato Producers.The market for tomatoes is perfectly competitive.The market price of a bushel of tomatoes is $18.If the market price increases to $20,the farmer's marginal revenue _ and the profit-maximizing output _.

A) increases;increases
B) increases;decreases
C) decreases;increases
D) decreases;decreases

Question

(Figure: Costs and Profits for Tomato Producers) Use Figure: Costs and Profits for Tomato Producers.The market for tomatoes is perfectly competitive.The market price of a bushel of tomatoes is $18.If the market price increases to $20,the farmer's marginal revenue _____ and the profit-maximizing output _____.

A) increases;increases
B) increases;decreases
C) decreases;increases
D) decreases;decreases

Caitlin Rackley · Accepted Answer

Final Answer : A, Explanation :  In a perfectly competitive market, the marginal revenue equals the market price. If the market price increases from $18 to $20, the marginal revenue also increases. Since the profit-maximizing output is where marginal revenue equals marginal cost, and the marginal revenue has increased, the farmer will increase production to where the new marginal revenue equals marginal cost, thus increasing the profit-maximizing output.

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