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

Question

Quizplus · Accepted Answer

When price equals average total cost, the firm is breaking even. However, if average total cost is less than marginal cost, the firm is producing at a level where the cost of producing an additional unit is higher than the revenue it would generate. To maximize profits, the firm should reduce output until marginal cost equals price.

Consider a Perfectly Competitive Firm That Is Producing a Level