In a competitive market, if the firm faces a market price of P3, what would be the output decision?

In a competitive market, a firm typically makes its output decision based on the intersection of marginal cost and market price. When the firm faces a market price of P3, it will seek to maximize profit by producing a quantity of output where its marginal cost (MC) equals the market price. This decision ensures that the firm is not leaving potential profits on the table, as producing fewer units would mean foregoing additional contributions to profit.

The correct choice to produce output quantity Q4 indicates that at this output level, the marginal cost matches the market price P3. At this point, the firm’s profit is maximized, as producing more than Q4 would lead to a marginal cost that exceeds the market price, thus reducing profit.

Other output quantities would respectively reflect suboptimal production levels: lower output quantities would not utilize the market price potential fully, while producing beyond Q4 would incur a loss on each additional unit. This optimal decision-making process underpins the behavior of firms within competitive markets, aligning output with the prevailing market price.