To determine the output level at which a perfectly competitive firm should produce, we need to analyze the information provided, primarily focusing on profit maximization, which occurs where marginal cost (MC) equals marginal revenue (MR). In a perfectly competitive market, the price the firm receives for its product is equal to the marginal revenue.
From the table, calculate total cost (TC) and profit for each output level:
- Total Cost (TC) = Fixed Cost + Variable Cost
- Profit = Total Revenue - Total Cost
Calculating these:
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For 300 units (10 workers):
- TC = 100 + 90 = 190
- Profit = 150 - 190 = -40 (loss)
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For 800 units (20 workers):
- TC = 100 + 295 = 395
- Profit = 400 - 395 = 5 (profit)
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For 1,200 units (30 workers):
- TC = 100 + 490 = 590
- Profit = 600 - 590 = 10 (profit)
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For 1,500 units (40 workers):
- TC = 100 + 670 = 770
- Profit = 750 - 770 = -20 (loss)
Based on the profit calculations, the firm will:
- incur a loss at 300 units,
- make a small profit at 800 and 1,200 units, and
- incur a loss again at 1,500 units.
Since the profit is highest at 1,200 units (profit of 10), the firm should choose to produce 1,200 units of output.
Thus, the correct response is: The firm should choose to produce 1,200 units of output.