Final answer:
The total profit at the optimal output level for a competitive firm is the largest difference between total revenue and total cost, occurring where marginal revenue equals marginal cost.
Step-by-step explanation:
The total profit for a competitive firm in a perfectly competitive market is determined by the disparity between total revenue and total cost. In order to maximize profit, the firm must identify the optimal output level, where the difference between these two variables is the largest. This occurs when the firm produces up to the point where marginal revenue equals marginal cost.
In a perfectly competitive market, where firms are price takers, the marginal revenue is equivalent to the price of the good. Therefore, the firm aims to produce up to the point where the price equals the marginal cost. At this equilibrium, the firm is operating efficiently and maximizing its profit.
The critical comparison for profit determination lies in the relationship between the market price and the average cost at the quantity produced. If the market price surpasses the average cost at this production level, the firm stands to make a profit. However, if the market price falls below the average cost, the firm will incur losses. This fundamental economic principle reflects the necessity for firms in perfectly competitive markets to align their production with market conditions, ensuring that they operate at an output level where the price equals the marginal cost, thereby optimizing their profitability within the competitive landscape.