Final answer:
To maximize total revenue, a firm needs to find the output level where the difference between total revenue and total cost is the greatest, which also means equating marginal revenue with marginal cost. An example with a farmer selling raspberries illustrates that the optimal output maximizes profits, which can change with adjustments in price.
Step-by-step explanation:
The optimal price and quantity to maximize total revenue for a perfectly competitive firm occurs when marginal revenue, which is equal to the market price, matches the marginal cost of production. The goal is to find the point where the difference between total revenue and total cost is the largest, signifying the highest profit. If the market price is higher than the average cost at this level of output, the firm will earn profits. However, if the market price falls below this point, the firm may incur losses but will choose the output level where losses are minimized.
To illustrate, consider a farmer selling raspberries for $4 per pack. If the price doubles to $8, the total revenue at each quantity sold will also double. The maximum profit is achieved where the gap between total revenue (TR) and total cost (TC) is the widest. For instance, with TR at $240 and TC at $165 at a quantity (Q) of 60, the profit is $75. However, profits are maximized between an output of 70 and 80, which yields a profit of $90.