How to Determine Optimal Production Level in a Perfectly Competitive Market

What should a perfectly competitive firm do when its marginal revenue is $3.25, short-run marginal cost is $3.25, and long-run marginal cost is $3.00?

Marginal revenue and short-run marginal cost are both $3.25. Long-run marginal cost is $3.00. The firm should continue producing at its current level of quantity.

Explanation:

In a perfectly competitive market, a firm maximizes its profit by producing at a quantity where marginal cost (MC) equals marginal revenue (MR). In this case, the marginal revenue is $3.25, which is equal to the marginal cost in both the short run and the long run.

Since the firm's marginal revenue is equal to its marginal cost at the current level of quantity, there is no incentive to change production levels. Producing more or less would result in a different marginal cost or marginal revenue, which would not optimize the firm's profit. Therefore, the firm should continue producing at its current level of quantity.

Detailed Explanation:

When a perfectly competitive firm's marginal revenue is equal to both short-run and long-run marginal costs, it indicates that the firm is already operating at the optimal production level. This means that the firm is producing the quantity of output where it maximizes its profit.

In a perfectly competitive market, firms are price takers and face a horizontal demand curve at the equilibrium market price. By equating marginal revenue to marginal cost, the firm ensures that it is maximizing its profit and operating efficiently.

Any deviation from the current production level would result in either underproduction (if producing less) or overproduction (if producing more), leading to lower profits for the firm. Therefore, in this scenario, where all marginal costs are equal, the firm should maintain its current level of production to optimize its profit.