A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00,average total cost is $4.00,and marginal cost is $3.00.In order to maximize profits,this firm should
A)shut down.
B)decrease output.
C)increase output.
D)increase the market price.
E)not change output.This firm is at its profit-maximizing position.

Question

Quizplus · Accepted Answer

Since the price of the good is higher than the average variable cost ($4 > $2), the firm should continue to operate in the short run. In order to maximize profits, the firm should produce the quantity where marginal cost equals the price of the good, which is at an output level where MC = $4.00. Since the current marginal cost is $3.00, the firm should increase output to reach the profit-maximizing level. Therefore, the correct answer is to increase output (choice C).

A Perfectly Competitive Firm Facing a Price of $4