Question

A perfectly competitive firm maximizes its profit by________.
A. producing the output at which marginal cost equals the market price.
B. setting its price at the highest level possible.
C. producing the output at which its price equals marginal revenue.
D. producing the output at which price equals minimum average variable cost.

Answer 1

Answer:

The correct answer is option A.

Explanation:

A perfectly competitive market has large number of sellers producing homogenous products. As a result, no single firm is able to affect the price level. So all the firms have their individual demand curves as a horizontal line at the price level.

This demand curve also represents marginal revenue. The firm is able to maximize profit when the price and marginal revenue is equal to the marginal cost.

Here, the revenue earned from the last unit of product is equal to the cot incurred in producing the last unit.