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 $2.50. The minimum possible average variable cost is $2.00. The market price of the product is $2.50. To maximize profits or minimize losses, the firm should
A) continue producing 1,000 units.
B) continue production, but produce less than 1,000 units.
C) increase production to more than 1,000 units.
D) shut down.

Question

Quizplus · Accepted Answer

The firm should continue producing 1,000 units because the market price equals the marginal cost, which is the profit-maximizing condition in a competitive market. The price also covers the average variable cost, so the firm should not shut down.

A Firm Sells a Product in a Purely Competitive Market