A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $4.00 and the market price is $4.50. What should the firm do?
A) shut down if the minimum possible average variable cost is below $4.50
B) decrease output if the minimum possible average variable cost is below $4.50
C) increase output if the minimum possible average variable cost is below $4.50
D) decrease output if the minimum possible average variable cost is above $4.50

Question

Quizplus · Accepted Answer

In a purely competitive market, firms should produce at the output level where marginal cost equals market price in order to maximize profits. In this case, the firm’s marginal cost is $4.00 and the market price is $4.50, indicating that the firm should continue to produce and increase its output as long as the minimum possible average variable cost is below $4.50. Therefore, the best choice is to increase output if the minimum possible average variable cost is below $4.50.

A Firm Sells a Product in a Purely Competitive Market