Final answer:
In a perfectly competitive market, a firm determines the quantity that maximizes profit by setting marginal revenue equal to marginal cost.
Step-by-step explanation:
In a perfectly competitive market, the optimal values of q*, p*, and profit level will depend on the demand and cost conditions. A firm operating in a perfectly competitive market takes the market price (p*) as given and determines the quantity (q*) that maximizes its profit. This occurs at the point where marginal revenue (MR) equals marginal cost (MC).
If the market price (p*) is above the average cost (AC), the firm makes a profit. The profit level will be determined by the difference between the price and the average cost multiplied by the quantity: Profit = (p* - AC) * q*.