In the short run, a firm operating in a perfectly competitive market achieves profit maxim… — JAMB UTME

In the short run, a firm operating in a perfectly competitive market achieves profit maximization by expanding output up to the level where marginal cost ( $MC$ ) is equal to which of the following?

Marginal revenue ( $MR$ ), which is also equal to market price ( $P$ )Answer
B
Zero, to ensure total variable costs are kept to a minimum
C
Average fixed cost ( $AFC$ ), at its lowest point
D
Total revenue ( $TR$ ), to balance overall earnings with cost

Answer

Marginal revenue (

MR

), which is also equal to market price (

P

)

Under perfect competition, each firm is a price taker facing a perfectly elastic demand curve where market price equals marginal revenue (

P = MR

). The universal rule for profit maximization requires producing output where marginal revenue equals marginal cost (

MR = MC

). Therefore, the firm maximizes short-run profit where marginal cost equals marginal revenue and price.

Step-by-Step Solution

Identify the firm's market structure

The firm operates under perfect competition where it is a price taker facing a perfectly elastic horizontal demand curve, making

P = AR = MR

Individual competitive firms cannot influence market price.

Apply the general profit maximization rule

Profit is maximized where marginal revenue equals marginal cost (

MR = MC

MR > MC

, producing an additional unit adds more to revenue than cost. If

MR < MC

, reducing production saves more cost than revenue lost.

Combine the conditions

The short-run output determination condition is

P = MR = MC

Since price equals marginal revenue for a competitive firm,

MC

must equal both

MR

and

P

Key Concept

Short-run Profit Maximization under Perfect Competition (

P = MR = MC

)

Estimated Time:45s

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic