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) increase output if the minimum possible average variable cost is above $4.50

Question

Zybrea Knight · Accepted Answer

Final Answer : C, Explanation :  In a purely competitive market, a firm should continue producing as long as the price (or marginal revenue) is above the marginal cost. Since the market price ($4.50) is higher than the marginal cost ($4.00), the firm should increase output to maximize profit. The average variable cost is not directly relevant to the decision to produce more at the margin.

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