Consider a firm operating in a perfectly competitive market. At its current output of 200 units, marginal revenue is $28. At this output, average total cost is minimized and equals $25. Given this information, what should the firm do?
A)Continue to produce 200 units, since costs per unit are minimized
B)Increase output beyond 200 units, since this higher output will yield the profit maximizing output level.
C)Decrease output below 200 units, since this lower output will result in the profit maximizing output level.
D)More information is needed to determine the firm's next step.

Question

Consider a firm operating in a perfectly competitive market. At its current output of 200 units, marginal revenue is $28. At this output, average total cost is minimized and equals $25. Given this information, what should the firm do?
A)​Continue to produce 200 units, since costs per unit are minimized
B)​Increase output beyond 200 units, since this higher output will yield the profit maximizing output level.
C)​Decrease output below 200 units, since this lower output will result in the profit maximizing output level.
D)​More information is needed to determine the firm's next step.

Quizplus · Accepted Answer

Since the market is perfectly competitive, the firm is a price taker, meaning it cannot influence the market price. Therefore, to maximize profit, the firm should produce at a level where marginal cost (MC) equals marginal revenue (MR). At the current output of 200 units, MR is greater than MC (since MR is $28 and we don't have information about MC). Therefore, the firm can increase output beyond 200 units to increase profit.

Note that at the profit-maximizing output level, MR should equal MC, not average total cost (ATC). However, since we don't have information about MC, we cannot determine the exact level of output where MR equals MC and where the firm should maximize profit.

Consider a Firm Operating in a Perfectly Competitive Market