Answer :
In a perfectly competitive market, the firm should produce and sell 201 units of microwave ovens at a market price of $500. In a perfectly competitive market, firms aim to maximize their profits by producing at the quantity where marginal cost equals marginal revenue.
However, in the short run, a firm should continue producing as long as the market price exceeds its average variable cost to cover its variable costs.
Given that the fixed cost is $100, the average variable cost can be calculated as the difference between the average total cost and the fixed cost, which is $200 - $100 = $100. Since the market price of a microwave oven is $500, which is higher than the average variable cost, the firm should continue producing in the short run.
To determine the profit-maximizing quantity, we compare the average total cost at different levels of production. The average total cost when selling 201 units is $201. Since the market price of $500 exceeds the average total cost of $201, the firm should increase its production to 201 units to maximize its profits.
In summary, in a perfectly competitive market with a market price of $500, the firm should produce and sell 201 units of microwave ovens. This decision ensures that the firm covers its average variable cost and maximizes its profits in the short run.
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