Explain the marginal revenue and marginal cost approach to profit maximization and use it to describe profit, loss, and shut down situations for the purely competitive firm

What will be an ideal response?

The purely competitive firm operating in the short run is a price taker that can maximize profits (or minimize losses) only by changing its level of output. The marginal revenue–marginal cost approach to profit maximization basically sets the level of output at the quantity where marginal revenue (or price) equals marginal cost. There are three possible cases to consider when using this approach. First, the firm will maximize profits when MR=MC at an output level where price is greater than average total cost. Second, the firm will minimize losses when MR=MC at that output level where price is greater than the minimum average variable cost (but less than average total cost). Third, the firm will shut down when MR=MC at an output level where price is less than average variable cost.