CFA Practice Question

CFA Practice Question

All firms in a competitive industry have identical cost and production schedules.

Quantity | Marg Cost | Total Cost | Avg Cost

1 | 53 | 60 | 60
2 | 32 | 113 | 56.5
3 | 26 | 145 | 48.33
4 | 21 | 171 | 42.75
5 | 19 | 192 | 38.4
6 | 20 | 211 | 35.17
7 | 27 | 231 | 33
8 | 30 | 258 | 32.25
9 | 32 | 288 | 32
10 | 40 | 320 | 32
11 | 50 | 360 | 32.73
12 | 65 | 410 | 34.17

Assume the market is in competitive equilibrium. If a firm sets production at a level of 11 units:
A. Quantity produced is suboptimal and profits can be increased by producing one more unit.
B. Quantity produced is suboptimal and profits can be increased by producing one less unit.
C. Quantity produced may be optimal or suboptimal depending upon the average cost.
Explanation: As the market is competitive, the price prevailing must be 32 (point where average cost = marginal cost). The 11th unit takes 50 to produce, but generates extra revenue of only 32, so profit can be increased by 50 . 32 = 18 by not producing the 11th unit.

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