Final answer:
A firm can maximize profit by determining the level of output through strategies such as analyzing the relationship between marginal revenue and marginal cost, and considering the market price and average cost.
Step-by-step explanation:
A firm can maximize profit by determining the level of output through several strategies.
Firstly, the firm needs to determine the quantity of output where total revenues exceed total costs by the greatest amount, or where total revenues fall short of total costs by the smallest amount. This can be achieved by analyzing the relationship between marginal revenue, which is the price for a perfectly competitive firm, and marginal cost. The firm should produce more output until marginal revenue is equal to marginal cost.
Secondly, the firm should consider the market price and average cost. If the market price is above average cost at the profit-maximizing quantity of output, then the firm is making profits. However, if the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses.