In a perfectly competitive dairy market, how do firms determine their output level?

In a perfectly competitive dairy market, firms determine their output level by looking at the price of milk and their costs. Since many companies sell similar products, they cannot set their own prices; instead, they accept the market price. Each firm will produce milk until the point where the price they receive for each gallon equals the cost of producing that gallon. For example, if the market price of milk is $3 per gallon and it costs a firm $2 to produce one gallon, the firm will continue to produce as long as it can cover its costs and make a profit. This process ensures that firms produce the quantity of milk that maximizes their profits while remaining competitive in the market.