Question

Output (Q) = 5000 pounds
Price (P) = $5.00 per pound
Average variable cost (AVC) = $4.00
Marginal cost (MC) = $4.25
Average total cost (ATC) = $4.50
If the firm in a purely competitive market, should the firm increase, decrease or not produce the output? Why?
How should the firm determine the optimal level of output?

Answer 1

To maximize its profits the firm should reach the equality MR = MC = P
Its P > MC, 5 > 4.25, so it should increase its output.
As its P > ATC, it is profitable and should increase its output to maximize profit.

How should the firm determine the optimal level of output?
Output (Q) = 5000 pounds
Price (P) = $5.00 per pound
Average variable cost (AVC) = $4.00
Marginal cost (MC) = $4.25
Average total cost (ATC) = $4.50
Answer:
To maximize its profits the firm should reach the equality MR = MC = P
Its P > MC, 5 > 4.25, so it should increase its output to the point, where P = MR = MC = 5.