Final answer:
A firm in a perfectly competitive industry should produce at the point where marginal revenue equals marginal cost to maximize profits or minimize losses, considering whether the market price is above or below average cost.
Step-by-step explanation:
Profit Maximization in Perfect Competition
In a perfectly competitive industry, a firm should produce at the quantity of output where marginal revenue equals marginal cost in order to maximize profits or minimize losses.
This point ensures that the firm is covering all of its variable costs and is making the highest possible profit given the market price. It is important to note that if the market price is above the firm's average cost, the firm will earn a profit, whereas if the market price is below the average cost, it will incur a loss.
When making output decisions, a perfectly competitive firm faces a market price that is determined by supply and demand and is the same for every firm in the market. This given market price is equal to the marginal revenue for the firm.
Thus, in the short run, perfectly competitive firms will increase production up to the point where the cost of producing one additional unit (marginal cost) is equal to the revenue gained from selling that additional unit (marginal revenue).