A local dairy farm operates in a perfectly competitive market. Recently, due to an increase in demand for milk, the price of milk in the market has risen. How should the dairy farm respond to maintain its profit-maximizing output level in the short run?

In a perfectly competitive market, a dairy farm should respond to the rising price of milk by increasing its production to maximize profits. When the price of milk goes up, the farm can sell more milk at a higher price, which means it can earn more money for each unit sold. To do this, the farm will look at its marginal cost, which is the cost of producing one more gallon of milk. If the price is greater than the marginal cost, the farm should produce more milk because each additional gallon will add to its profits. For example, if the farm normally produces 100 gallons of milk at a price of $2 per gallon, but the price rises to $3, it should consider increasing production as long as the cost of producing those additional gallons is lower than $3.