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How does a firm determine which level of output to produce in order to maximize profit?...

How does a firm determine which level of output to produce in order to maximize profit? What happens to profit if the firm produces greater than or less than the optimal level of output?
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Answer #1

If the firm is operating in a perfectly competitive market, the profit maximizing condition is: Price = Marginal Cost. The firm will produce the quantity of output at the point where P = MC.

If the firm is operating in an imperfectly competitive market ( i.e. monopoly, monopolistic competition and oligopoly), the profit maximizing condition is: Marginal revenue = Marginal Cost. The firm will produce the quantity of output at the point where MR= MC.

If the firm will produce greater than or less than the optimal level of output, it will incur loss.

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