A perfectly competitive industry experiences an industry-wide increase in production costs, shifting the market supply curve leftward from S1 S_1\,S1 to S2S_2S2, as shown in the diagram below.
One individual firm (Firm X) is completely unaffected by this cost increase due to a long-term fixed-price contract for its inputs. Prior to this shift, the market and Firm X were in long-run equilibrium.
Which of the following correctly describes how Firm X adjusts its production in the short run to maximise profit, and its resulting economic profit?
Firm X's marginal revenue curve shifts downward to match the lower market quantity Q2Q_2Q2. To maximize profit, it reduces its output from q1q_1q1 to q2q_2q2, experiencing short-run economic losses.
Firm X's marginal revenue curve remains constant at MR1=P1MR_1 = P_1MR1=P1 because individual firms in perfect competition cannot change their prices, leaving its output at q1q_1q1 and continuing to earn normal profits.
Firm X's marginal revenue curve shifts upward to MR2=P2MR_2 = P_2MR2=P2. To maximize profit, it expands its output from q1q_1q1 to q2q_2q2 (where MC=MR2MC = MR_2MC=MR2), earning supernormal profits because P2>ATCP_2 > ATCP2>ATC at q2q_2q2.
Firm X's marginal revenue curve shifts upward to MR2=P2MR_2 = P_2MR2=P2. To maximize profit, it reduces its output from q1q_1q1 to q2q_2q2 to match the contraction in market quantity, earning supernormal profits.