Final answer:
FIFO typically generates a higher gross profit than LIFO when prices are increasing, as it sells older inventory first which is assumed to be cheaper. A perfectly competitive firm aims for the quantity where the marginal cost equals marginal revenue and where this quantity yields total revenue exceeding total costs.
Step-by-step explanation:
Between FIFO (First In, First Out) and LIFO (Last In, First Out) inventory accounting methods, FIFO generally produces the highest gross profit during periods when prices are rising.
This is because FIFO assumes that the oldest, often least expensive inventory is sold first, resulting in a lower cost of goods sold (COGS) and a higher gross profit compared to LIFO, where the most recently acquired, often more expensive inventory is sold first. In an environment where costs are increasing, LIFO would report higher COGS and thus a lower gross profit.
A perfectly competitive firm must consider its total revenue and total cost to determine the highest profit. The firm sells its product at the prevailing market price and aims to produce the quantity that maximizes the difference between total revenue and total cost.
Applying this to the raspberry farm example, if each pack of raspberries is sold for $4, the farm increases its total revenue by increasing the quantity sold.
To find the profit-maximizing quantity of output, the firm will apply two rules. Firstly, the firm will produce up to the point where marginal cost equals marginal revenue.
Secondly, it will ensure that at this level of output, total revenue is greater than total cost to ascertain a profit is made, as illustrated by the vertical gap between the total revenue and total cost curves at varying levels of output.