To maximize profit, a perfectly competitive firm that decides not to shut down will choose the rate of output at which

Question

Quizplus · Accepted Answer

In perfect competition, a firm will choose to produce where marginal cost (MC) equals price (P) in order to maximize profits. This is because producing any additional unit of output would cost more (due to increasing marginal cost) than the revenue generated (based on the given price). Therefore, the firm would not produce any additional unit beyond this point. Choosing a higher output level where P>MC would mean that the revenue generated from selling additional units is higher than the cost incurred, so the firm could increase profits by producing more. Similarly, choosing a lower output level where P<MC would mean that the cost incurred is higher than the revenue generated, so the firm could increase profits by producing less. Therefore, the optimal choice is where P= MC.

To Maximize Profit, a Perfectly Competitive Firm That Decides Not