onsider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm a. could increase profits by reducing output from 300 units. b. could increase profits by increasing output from 300 units. c. should decide to increase the price above $20. d. should shut down, since it must be losing money.

The best option is (d). should shut down, since it must be losing money

Explanation:

Step 1: Calculate the total revenue from sales

Total revenue from sales=price per unit*number of units

where;

price per unit=$20

number of units=300

replacing;

Total revenue = (20*300) = $6,000

Step 2: Total cost from marginal cost

The marginal cost is the change in total production cost caused by increasing a unit in production.

Total marginal cost = (20*300) + (22*1) = $6,022

Step 3: net profit

net profit=total revenue-total marginal cost

where;

total revenue=$6,000

total marginal cost=$6,022

replacing;

profit = (6,000-6,022) = -$22

This means production of additional units increases the production cost and thus reducing the profits too.