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 average variable cost is $3.00. 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 produce less than 800 units.
C) increase production to more than 800 units.
D) shut down.

Question

Quizplus · Accepted Answer

To maximize profits, the firm should produce where marginal cost equals market price. Since the market price ($4.00) is greater than the marginal cost ($3.50), the firm should increase production beyond 800 units.

A Firm Sells a Product in a Purely Competitive Market