What would a competitive firm choose to do if facing a market price of P1?

In a competitive market, a firm will determine its level of output based on the relationship between the market price and its marginal cost. When the market price is P1, the firm seeks to maximize profits by producing the quantity of output at which marginal cost equals the market price. This is a fundamental principle in microeconomics regarding profit maximization.

Choosing to produce output quantity Q2 suggests that this level of output is where the firm’s marginal cost of production aligns with the market price P1. When the output is set at Q2, the firm is maximizing its profits since producing more or less would either exceed costs or not cover variable costs respectively.

It is essential for firms in a competitive market not to produce at quantities where the marginal cost is significantly below or above the market price, as this would result in lower profits or even losses. If the firm were to choose another quantity, it would not be operating at the optimal profit-maximizing level. The choice of Q2 accurately reflects the balance between production costs and the prevailing market price, thereby ensuring the firm is making the most efficient decision in terms of output.