Question

# At the current level of output for a perfectly competitive firm, the following data exist: Price...

At the current level of output for a perfectly competitive firm, the following data exist:
Price = \$21
Marginal cost = \$5
Average variable cost = \$9
Average total cost = \$12
What should this firm do?

The firm should shut down

The firm should lower the price

The firm should decrease output

The firm should increase output

The firm should keep the same level of output

Answer is D. Firm should increase output.

In perfectly competitive market a firm should produce where market price ( which is also MR) equals marginal cost. When production occurs at this point then firm will be maximising profit.

Here marginal cost is \$5 and marginal revenue or price is \$21, so firm should increase the output until marginal cost (MC) becomes equal to \$21, which is price.

If marginal cost was higher than market price then firm should decrease the production until MC become equal price.

So profit maxisming condition for a firm is where MR= MC.