Suppose the price of an item in a perfectly competitive market is $3. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms should continue to produce as long as the price is greater than the average variable cost (P > AVC). In this case, the price is $3 and the TVC is $80, so the AVC is $0.80 ($80/100 units). Since $3 > $0.80, the firm should continue to produce. Additionally, since the price is equal to the MC at an output of 100 units, the firm is maximizing its profit at this level of output. The fact that average total cost is $4 per unit and that the total cost is $400 is not relevant for determining whether the firm should continue to produce in the short run.

Suppose the Price of an Item in a Perfectly Competitive