15 You run a firm in a highly competitive market. One of the inputs you need has just increased in price.
Which of the following is true?
A. You can’t raise your price.
B. You should shut down.
C. You will make a marginal loss if you don’t decrease production.
D. Your firm’s demand curve will fall.

Question

15 You run a firm in a highly competitive market. One of the inputs you need has just increased in price. 
Which of the following is true?
A.    You can’t raise your price.
B.    You should shut down.
C.    You will make a marginal loss if you don’t decrease production.
D.    Your firm’s demand curve will fall.

BlackTom AI · Accepted Answer

The scenario presents a firm in a highly competitive market facing an increase in the price of an input, which raises the marginal cost of production.
Option A: 'You can’t raise your price.' In perfect competition, individual firms are price takers, so they generally cannot raise the market price. However, this statement is about pricing power rather than the production decision after an input price increase, and it ignores the cost implications of higher input costs.
Option B: 'You should shut down.' Shutting down is typically optimal only if the price or average revenue doesn’t cover variable costs in the short run. An input cost increase raises costs, but it does not automatically imply that revenue won’t cover variable costs; a firm may still operate if it can cover variable costs and contribute to fixed costs, so shutting down is not universally required.
Option C: 'You will make a marginal loss if you don’t decrease production.' With higher marginal costs due to the pricier input, the marginal cost curve shifts upward. If output is kept where marginal cost exceeds marginal revenue (which is still determined by the market price in a competitive setting), each additional unit adds more cost than revenue, generating a marginal loss on those units. Deferring a reduction in output can thus produce losses on the marginal units until output is adjusted to where MC equals MR.
Option D: 'Your firm’s demand curve will fall.' A single firm in perfect competition does not shift its own demand curve due to its input cost changes; the market demand curve determines the price, and the firm’s individual demand is a horizontal line at the market price. The price increase in inputs does not cause the firm’s demand curve to fall by itself.
So, considering the cost increase and the behavior of output decisions in the short run, the option about potential marginal losses from producing beyond the point where MC=MR captures the correct implication of higher input costs for production choices.

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