Assume that the cost data in the following table are for a purely competitive producer. If the market price is \$20, what is the firm's profit-maximizing level of output?

• A. The output level where marginal cost is less than \$20
• B. The output level where average total cost equals \$20
• C. The output level where marginal cost equals \$20
• D. The output level where total cost is minimized

Answer: (C)

Verified step by step guidance

1. Understand that in a perfectly competitive market, the firm maximizes profit by producing the quantity where marginal cost (MC) equals the market price (P). This is because producing beyond this point would mean the cost of producing an additional unit is higher than the revenue gained, reducing profit.
2. Identify the market price given in the problem, which is \$20. This price acts as the firm's marginal revenue (MR) since the firm is a price taker in perfect competition.
3. Examine the cost data table to find the output level where the marginal cost (MC) is exactly equal to \$20. Marginal cost is the additional cost of producing one more unit of output.
4. Verify that at this output level, producing one more unit would increase cost beyond \$20, and producing one less unit would mean missing out on profitable sales, confirming this is the profit-maximizing output.
5. Note that average total cost (ATC) and total cost minimization are not the primary criteria for profit maximization in perfect competition; the key condition is where MC equals the market price.