Firm XYZ is operating in a perfectly competitive market where the prevailing price is Rs. 40. SMC of the firm, as calculated by the managers is Rs. 40 at output level of 25 units and is Rs. 48 at 28 units of output and keeps increasing and becomes greater than the price. So what according to you will be the profit maximizing level of output for the firm? (Assume that the price is greater than minimum AVC)

25 units

The correct answer is Option 4: 25 units

In a perfectly competitive market, for profits to be maximum, three conditions must hold: 1. The price must be equal to MC 2. Marginal cost must be non-decreasing 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC).

Profit Maximization Rule: A perfectly competitive firm maximizes profit where Marginal Cost (SMC) equals Price (P).

Analysis:

 At 25 units, SMC = Rs. 40, which is equal to the market price of Rs. 40.

At 28 units, SMC = Rs. 48, which is greater than the market price of Rs. 40.

Since SMC is increasing, any output greater than 25 would result in SMC > Price.

Conclusion: The firm maximizes profit at the output level where SMC = Price. Therefore, the profit-maximizing output is 25 units.