Question

For a firm in a perfectly competitive industry, price is equal to ______, or P = MR. So we can restate the MR = MC condition as P = MC?

1) Average cost
2) Marginal cost
3) Total cost
4) Fixed cost

Answer 1

The answer to the question is marginal cost (2) because in a perfectly competitive market, a firm's marginal revenue is equal to the market price, allowing for the profit-maximization condition MR = MC to be restated as P = MC.

Step-by-step explanation:

For a firm in a perfectly competitive industry, price is equal to marginal revenue (MR), or P = MR. Thus, when we address the condition for profit maximization, which is MR = MC (marginal cost), in the context of perfect competition, we can restate this as P = MC since price and marginal revenue are the same under perfect competition. Unlike a monopolistic firm where MR does not equal price due to the impact that changes in quantity have on price, a perfectly competitive firm takes the market price as given. This means the firm will follow the recommendation to produce at the output level where the market price (P) equals the marginal cost (MC), which aligns price with the point where producing one more unit costs the same as the price that unit will sell for, ensuring an efficient allocation of resources without generating a surplus or a shortage.