If a perfectly competitive firm is producing a quantity that generates P

Question

If a perfectly competitive firm is producing a quantity that generates P < MC, then profit:

Quizplus · Accepted Answer

In a perfectly competitive market, P = MC represents the profit-maximizing point. If the firm is producing a quantity that generates P < MC, then the firm is producing more than the profit-maximizing quantity. This implies that the marginal cost of producing the last unit is greater than the marginal revenue received from selling that unit, and hence the firm is making a loss on that unit. Therefore, the firm can increase profit by decreasing production to the level where P = MC, or by producing no output if the variable cost of production is greater than the revenue received. Thus, option D is correct as reducing production will lower the firm's loss or increase its profit. The other options are incorrect as they will not help in improving the firm's profit in the short run in the scenario described.

If a Perfectly Competitive Firm Is Producing a Quantity That