Question

The PS equation = (1+m)W. When there is perfect competition, we know that m will equal

A. W
B. W/P
C. P
D. 1
E. 0

Answer 1

In a perfectly competitive market, the markup (m) over cost in the profit-maximizing PS equation (PS = (1+m)W) equals zero (m = 0), because a firm can only sell at the market price and cannot set prices above market equilibrium.

Step-by-step explanation:

In the context of a perfectly competitive market, the PS equation is represented as PS = (1+m)W. The term m in this equation stands for the markup over cost. However, when there is perfect competition, a firm is a price taker which means it cannot set the price above the market equilibrium; it can only sell products at the market price. Thus, the markup m is equal to zero (m = 0). This condition is based on the profit-maximizing rule where MR = MC, and for a perfectly competitive firm, the marginal revenue (MR) is equal to the price (P).