Question

At what output does a perfectly competitive firm maximize its profit?

a. when marginal cost equals average fixed cost
b. when average total cost equals average revenue
c. when total revenue equals total variable cost
d. when marginal cost equals marginal revenue

Answer 1

A perfectly competitive firm maximizes profit when its marginal cost equals marginal revenue, which is also the market price.

Step-by-step explanation:

A perfectly competitive firm maximizes its profits at the output level where marginal cost (MC) equals marginal revenue (MR). In the short run, marginal revenue is the same as the market price as the firm is a price taker and cannot influence the price of its product. Therefore, the condition for profit maximization in perfect competition is P = MR = MC. At this point, the firm cannot increase profit by producing more or less as the cost of producing an additional unit (marginal cost) equals the revenue generated from selling that additional unit (marginal revenue).