A perfectly competitive firm will maximize profits by choosing an output level where
A)Price is greater than marginal cost.
B)Price equals marginal cost.
C)Price equals total cost.
D)Price is greater than total cost.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm is a price taker and has no control over the market price. Therefore, the firm should choose an output level where marginal cost equals price to maximize profits. If the firm chooses a lower output level, its marginal revenue will be greater than the marginal cost, and it can increase profits by producing more. On the other hand, if the firm chooses a higher output level, its marginal cost will be greater than its marginal revenue, and it can increase profits by producing less. Thus, the firm should choose the output level where price equals marginal cost to maximize profits.

A Perfectly Competitive Firm Will Maximize Profits by Choosing an Output