A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $4.00 and the market price is $4.50. What should the firm do?
A)shut down if the minimum possible average variable cost is below $4.50
B)decrease output if the minimum possible average variable cost is below $4.50
C)increase output if the minimum possible average variable cost is below $4.50
D)increase output if the minimum possible average variable cost is above $4.50

Question

Quizplus · Accepted Answer

In a purely competitive market, a firm should continue producing as long as the price (or marginal revenue) is above the marginal cost. Since the market price ($4.50) is higher than the marginal cost ($4.00), the firm should increase output to maximize profit. The average variable cost is not directly relevant to the decision to produce more at the margin.

A Firm Sells a Product in a Purely Competitive Market