Consider a firm operating in a perfectly competitive market. At its current output of 200 units, marginal revenue is $25. At this output, average total cost is decreasing and equals $22. Given this information, what should the firm do?
A)Continue to produce 200 units, because this maximizes profits.
B)Increase output beyond 200 units, since a higher output will yield the profit maximizing output level.
C)Decrease output below 200 units, since a 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 $25. At this output, average total cost is decreasing and equals $22. Given this information, what should the firm do?
A)​Continue to produce 200 units, because this maximizes profits.
B)​Increase output beyond 200 units, since a higher output will yield the profit maximizing output level.
C)​Decrease output below 200 units, since a 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

The profit maximizing output level is where marginal revenue equals marginal cost. However, since the firm is operating in a perfectly competitive market, marginal revenue equals price. Therefore, at the current output of 200 units, the price is $25. If the firm's average total cost is $22, then its marginal cost must be less than $25, since average total cost is decreasing at this output level. As long as the marginal cost is less than $25, the firm can increase its output beyond 200 units and still earn a profit. Therefore, the firm should increase its output beyond 200 units in order to maximize its profits.

​Consider a Firm Operating in a Perfectly Competitive Market

Consider a Firm Operating in a Perfectly Competitive Market