Quick Quiz: How does a competitive firm determine its profit-maximizing level of output? When does a profit-maximizing competitive firm decide to shut down? When does it decide to exit a market? * When a competitive firm doubles the amount it sells, the price remains the same, so its total revenue doubles.
* A profit-maximizing aggressive firm sets price equal to its minor cost. If price were above marginal cost, the firm could increase profits by increasing output, while if price were below marginal cost, the firm could increase profits by decreasing output. A profit-maximizing competitive firm decides to shut down in the short run when price is less than average variable cost. In the long run, a firm will exit a market when price is less than average total cost.
* In the long run, with free entry and exit, the price in the markets equal to both a firm’s marginal cost and its average total cost, The firm chooses its quantity so that marginal cost equals price; doing so ensures that the firm is maximizing its profit. In the long run, entry into and exit from the industry drive the price of the good to the minimum point on the average-total-cost curve.
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