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As the individual firm has to be a price-taker, each firm’s marginal revenue is the prevailing market price. Profits are the highest at the output level at which marginal cost is equal to marginal revenue, that is, to the market price of the output. Is profits are negative at this output level, the firm should close down.
An increase in marginal cost reduced output. A rise in marginal revenue increases output. The optimal quantity also depends on the output prices as well as on the input costs. Of course, the optimal supply quantity is affected by such noneconomic factors as technology, environment, etc.