Final answer:
In profit maximization, a firm produces where the price equals marginal cost. Economic profit per unit is the difference between the market price and average total cost. Total economic profit is this difference times the quantity produced.
Step-by-step explanation:
To use the marginal decision rule in profit maximization, the firm produces the output where the price P equals marginal cost MC. Economic profit per unit is the difference between the market price and the average total cost; total economic profit equals the economic profit per unit multiplied by the quantity produced. For a perfectly competitive firm, the profit-maximizing choice occurs at the level of output where marginal revenue MR = marginal cost MC. If the market price is above the average cost at the profit-maximizing quantity, the firm will make a profit.
If the market price is below the average cost, the firm will incur losses. Nevertheless, if there are fixed costs, the firm may continue to produce to minimize losses. The profit-maximizing quantity for a perfectly competitive firm, illustrated by Q = 80 in the example, is where marginal revenue equals marginal cost.