Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should
A) shut down.
B) not change its output.
C) reduce its output.
D) increase the market price.
E) expand its output.

Question

Quizplus · Accepted Answer

When average total cost is less than marginal cost, the firm is producing beyond the profit-maximizing output level. To maximize profits, the firm should reduce its output until marginal cost equals price.

Suppose a Perfectly Competitive Firm Is Producing a Level of Output