The market price for a perfectly competitive product is $10. If, at its current level of production, marginal cost is equal to $10.50, the firm should:
A) increase production until marginal cost declines to $10.
B) go out of business, as it is impossible to earn a profit when marginal cost exceeds price.
C) cut back on production until marginal cost declines to $10.
D) increase production until average total cost declines to $10.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms should produce where marginal cost equals market price to maximize profit. If marginal cost is higher than the market price, the firm should reduce production until marginal cost equals the market price.

The Market Price for a Perfectly Competitive Product Is $10