If a profit-maximising firm in a competitive market discovers that at its current level of production, price is less than marginal cost, it should:

Question

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If price is lower than marginal cost, the firm is not earning enough revenue to cover the cost of producing the last unit. Therefore, it should reduce its output to the point where marginal cost equals price. By doing so, the firm can increase its profitability. Exiting the industry is not the best choice because it may not be possible to recover the fixed costs already invested. Increasing output or keeping it the same would only exacerbate the problem of low profitability.

If a Profit-Maximising Firm in a Competitive Market Discovers That