Refer to the figure below. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 25 cents, then this firm should:

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm should produce at the quantity where marginal cost equals the market price. The figure shows that at a quantity of 80 doughnuts, the marginal cost is equal to 25 cents, which is the market price. At this quantity, the firm will be able to cover its variable costs and make some profit. If the firm produces less than 80, it will not be maximizing its profit because it could produce more at the same cost, and if it produces more than 80, the marginal cost will be higher than the market price, resulting in a loss. Therefore, the best choice for the firm is to produce 80 doughnuts.

Refer to the Figure Below