Question

If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct?

i. Price equals marginal revenue.
ii. Marginal revenue equals marginal cost.
iii. Price is greater than average total cost.
A) i only
B) i and ii only
C) ii and iii only
D) i and iii only
E) i, ii, and iii

Answer 1

A perfectly competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost, and if it's making an economic profit, the price is greater than average total cost.

Step-by-step explanation:

A perfectly competitive firm will maximize its profit by producing at the quantity of output where marginal revenue (MR) equals marginal cost (MC). This is because in perfect competition, the price is equal to marginal revenue.

So, option ii is correct: Marginal revenue equals marginal cost.

Additionally, if the firm is making an economic profit, the market price faced by the firm must be above the average total cost (ATC) at the profit-maximizing quantity of output.

Therefore, option iii is also correct: Price is greater than average total cost.

Based on the above explanations, the correct option is D) i and iii only.