A perfectly competitive firm will maximize profits when the:

Question

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In perfect competition, a firm will maximize profits by producing where marginal revenue equals marginal cost. This is because in perfect competition, the firm is a price taker and can sell all of its output at the market price. Therefore, to maximize profit, the firm must produce the quantity where the additional revenue from selling one more unit (marginal revenue) equals the additional cost of producing one more unit (marginal cost). If marginal revenue is lower than average variable cost (B), the firm should shut down in the short run as it cannot cover its variable costs. If the price is lower than marginal cost (C), the firm is not maximizing profit as it could increase profits by reducing production. If the price is higher than marginal cost (D), the firm is maximizing profit but could further increase profits by increasing production until marginal revenue equals marginal cost.

A Perfectly Competitive Firm Will Maximize Profits When The