Final answer:
Given that the market price of the product is $8.50, which is higher than both the marginal cost of $8.00 and the maximum average variable cost of $7.50, the firm should continue producing the current output of 500 units to maximize profit or minimize losses.
Step-by-step explanation:
If a firm is selling a product in a purely competitive market, the decision to produce more, or less, or to continue with the current level of output depends on the relationship between the market price, average cost, and marginal cost. Given that the marginal cost of producing 500 units is $8.00, the average variable cost is no more than $7.50, and the market price is $8.50, the firm should continue to produce since the market price exceeds the marginal cost. This will result in the firm maximizing profit or minimizing losses because each additional unit produced (beyond 500) contributes to covering fixed costs and adds to the profit since it costs less to make ($8.00) than what it sells for ($8.50).
However, it is important to also consider the average total cost. If the firm's average total cost is less than the market price at the output of 500 units, the firm will be making a profit. If the average total cost is greater, but the market price is still above the average variable cost, the firm should still produce in the short run and incur economic losses. This is because by producing, the firm covers some of the fixed costs, which it would have to pay anyway even if it shuts down production. If the market price is below the average variable cost, then the firm should shut down immediately to minimize losses.