A firm increased monthly output of good Y from 1,500 to 2,000 units with no effect on the market price. At 2,000 units, average cost is $3.50, marginal cost is $4, and marginal revenue is $5 at all output levels. Jake says the firm should raise output to 2,500 units to maximize profit, but Mathew expects price to rise to $5.50 soon and says the firm may still not maximize short-run economic profit even at 2,500 units. What is Mathew assuming? A) At 2,500 units MC will equal market price B) The firm is operating at the minimum of its MC curve C) No new firms enter the market in the short run D) Market demand is highly price elastic E) This firm serves the entire market

What you should notice about this firm

The firm’s output change from 1,500 to 2,000 units has no impact on market price, and marginal revenue (MR) is fixed at $5. That is the textbook setup for a price-taking (competitive) firm where $MR = P$.

How a competitive firm chooses output

A competitive firm maximizes profit by producing where $$MR = MC$$ as long as price is at least as high as average variable cost. At 2,000 units, $MR = 5$ and $MC = 4$, so increasing output raises profit until $MC$ rises to 5.

Why Mathew talks about a higher price

Mathew expects the market price (and thus $MR$) to rise to $5.50$. If that happens, the profit-maximizing condition becomes $$MC = 5.5,$$ which generally implies a higher optimal output than the one where $MC = 5$ (since $MC$ typically increases with output). So he is arguing that even producing 2,500 units might not be the profit-maximizing level once the price increases.

Which option matches the needed assumption

For a firm in a competitive market, a price increase can persist in the short run if supply cannot quickly expand through entry. That is exactly:

• C) no new firms enter the market in the short run.

Why the other options do not fit

• A describes the profit-max condition at a specific output, not an assumption about why price can rise.
• B is unrelated to the claim about future price and profit-max output.
• D (highly elastic demand) makes price increases harder to sustain.
• E contradicts the fact that output changes did not affect price; serving the entire market implies market power.