Final answer:
To maximize profit on a dairy farm producing cheese in a perfectly competitive market, match the price with marginal revenue and marginal cost. Profits can be visualized on a graph where they equal the area of total revenue minus the area of total costs. Changes in production costs, such as an increase in cheese price, will alter the supply curve.
Step-by-step explanation:
To determine the level of cheese production that maximizes profit in a perfectly competitive market, you need to apply the principle that profit is maximized when price equals marginal revenue (MR) and marginal cost (MC). Consider a scenario where cheese is sold at a fixed price. The dairy farm should produce cheese up to the point where the cost of producing an additional unit of cheese (MC) is equal to the revenue gained from selling that unit (MR). As an example, if the price is $5 for a pack of frozen raspberries and the average cost for producing 80 packs is $3.50, the raspberry farmer will produce a quantity where MR = MC, around 85 packs, as this will maximize profits.
In a graph representation, the farm's total revenue is displayed as a rectangle with the base being the quantity (85 packs) and the height being the price ($5). Total costs are illustrated as a rectangle with the base being the quantity (85 packs) and the height being the average cost (about $3.50). Profits are the area above the total cost rectangle and below the total revenue rectangle, shaded in blue.
If production costs increase, the firm will adjust its production quantity accordingly. For instance, if the cost of cheese increases by $0.75 per pizza, this will shift the supply curve upward by the same amount, representing the increased cost in production.