George Washington UniversityMBAD 6242

A firm operating in circumstances of perfect competition faces a market price of $10. It is producing 2,000 units of output daily at a total cost of $19,000. This firm:

1. should increase its output to improve its profit position
2. should reduce its output to improve its profit position
3. should shut down to minimize its loss
4. may or may not be at the output level yielding maximum profit - the information furnished is not sufficient to cover this point

Answer:

D. Level yielding maximum profit-

the information furnished is not sufficient to cover this point.
If the firm's price exceeds its average total cost ie total cost /quantity, then the firm is earning or generating an economic profit. That is , the economic profit the firm will be generating is supposed to be above normal profits and at the point where MR intersects with MC above the ATC curve. This means that the firm is producing at its profit maximizing output and is earning maximum profits. 
The average total cost is calculated by $19000/2000=$8.5
P=10
Therefore, 10>8.5 ie P>ATC.
When the price is more than the average total cost it means that the price should intersect with the marginal cost above the ATC curve and the firm will earn or is generating a profit and the information provided is not sufficient to cover the point.