Question

A firm facing a price of $10 in a perfectly competitive market decides to produce 100 widgets. If its marginal cost of producing the last widget is $12 and it is seeking to maximize profit, the firm should

Answer 1

The firm should decrease the production till the marginal cost equals the price that is $10.

​​​​​​In a perfectly competitive market, a firm maximizes its profits when the marginal cost is equal to the market price.

A firm can't charge a price higher than the market price because in that case, all the consumers will buy from other firms.

When marginal cost is higher than the price, the additional cost of producing an additional unit of output is higher than the revenue generated by that additional unit. So, firm makes losses on the units of output when the marginal cost exceeds the price. When marginal cost is less than price, there is an incentive to produce more because of revenue generated being higher then the cost incurred. So, as long as marginal cost is less than price, the firm should produce and stop the production once marginal cost becomes equal to the market price.

Here, the marginal cost of last unit produced is $12 whereas market price is only $10. It means that the firm has over produced. It has crossed the level where marginal cost is equal to the price. So, it has to cut down some of its production so that it reaches the level where marginal cost and price are equal at $10 to maximize profits.
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