A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 800 units is $3.50. The minimum possible average variable cost is $2.00. The market price of the product is $4.00. To maximize profits or minimize losses, the firm should
A)continue producing 800 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 the market price equals marginal cost, as long as the price is above the average variable cost. Here, the market price ($4.00) is above the marginal cost ($3.50) and also above the minimum average variable cost ($2.00), indicating the firm should increase production to align the marginal cost with the market price.

A Firm Sells a Product in a Purely Competitive Market