Question

A purely competitive firm will only produce in the short-run the output at which marginal cost and marginal revenue are equal provided that the price of the produce is greater than its average total cost of production.

a. True
b. False

Answer 1

The statement is true, as a purely competitive firm will produce at the output level where marginal cost equals marginal revenue, provided the market price is greater than average total cost, to ensure profit maximization or loss minimization.

Step-by-step explanation:

A purely competitive firm in the short-run will produce only the output where marginal cost (MC) and marginal revenue (MR) are equal, but this holds true under the condition that the price of the product is greater than the firm's average total cost (ATC). The statement in the question is true. In perfect competition, MR equals the price, and firms will only produce output at that level where the MR equals the MC, leading to profit maximization or at least minimizing losses. Should the firm's price be lower than ATC, producing additional products would lead to losses. In such a case, the firm will shut down in the short run to prevent further loss.

Therefore, a perfectly competitive firm will maximize profits or minimize losses by setting output where P = MR = MC, as long as P > ATC. If P < ATC, the firm should not be producing in the short run.