If a perfectly competitive firm has a random demand and known marginal cost, producing at a level that sets expected price equal to marginal cost minimizes the reduction in expected profit.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they cannot influence the market price. Therefore, the firm's optimal production level is where marginal revenue equals marginal cost. However, with random demand, the market price fluctuates. In this case, producing at a level where expected price equals marginal cost would ensure that the firm is not producing at a loss during low demand periods, while also not missing out on potential profits during high demand periods. Thus, this strategy minimizes the reduction in expected profit.

If a Perfectly Competitive Firm Has a Random Demand and Known