A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 1,000 units is $2.5. The minimum possible average variable cost is $2. The market price of the product is $2.5. To maximize profits or minimize losses, the firm should
A)continue producing 1,000 units.
B)continue production, but reduce output.
C)increase production.
D)shut down.

Question

Quizplus · Accepted Answer

In a purely competitive market, a firm maximizes profit or minimizes losses by producing at the level where price equals marginal cost, as long as the price is above the average variable cost. Here, the price ($2.5) equals the marginal cost at 1,000 units, and the price is above the minimum average variable cost ($2), indicating the firm should continue producing 1,000 units to maximize profits or minimize losses.

A Firm Sells a Product in a Purely Competitive Market