A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00, average total cost is $4.00, and marginal cost is $3.00. In order to maximize profits, this firm should
A) decrease output.
B) increase the market price.
C) not change output. This firm is at its profit- maximizing position.
D) shut down.
E) increase output.

Question

Quizplus · Accepted Answer

The firm should increase output because it is currently producing at a level where its marginal cost ($3.00) is less than the market price ($4.00). This means that each additional unit produced will contribute more to revenue than to costs, increasing the firm's profits.

A Perfectly Competitive Firm Facing a Price of $4