Question

Consider a perfectly competitive firm in the short run. Assume the firm produces the profit-maximizing output and earns economic profits. At the profit-maximizing output, all of the following are correct except that:

a) Marginal cost equals marginal revenue
b) Price equals average total cost
c) The firm is a price taker
d) The firm is a price maker

Answer 1

In a perfectly competitive market, a firm is a price taker and finds its profit-maximizing level of output where marginal revenue equals marginal cost and price equals average total cost.

Step-by-step explanation:

A perfectly competitive firm will find its profit-maximizing level of output where marginal revenue equals marginal cost and where price equals average total cost. This means that options a) Marginal cost equals marginal revenue and b) Price equals average total cost are both correct. The firm in a perfectly competitive market is actually a price taker, meaning it has no control over the market price; it simply takes the price established in the market. Option c) is also correct. The only incorrect statement is d) The firm is a price maker. In a perfectly competitive market, the firm has no market power to set or influence the price, so it is not a price maker.