A perfectly competitive firm will always maximize its profit or minimize its loss by:
A)setting marginal cost equal to marginal revenue in order to determine the optimal quantity of output.
B)setting marginal cost above average cost.
C)setting total cost minus total revenue at its maximum level.
D)creating a unique product.

Question

Quizplus · Accepted Answer

In perfect competition, a firm will be a price taker and faces a horizontal demand curve. Therefore, its marginal revenue (MR) is equal to the market price. To maximize profit, the firm should produce the quantity where its marginal cost (MC) equals MR. This ensures that the last unit produced adds the same amount to revenue as it does to cost, maximizing the difference between revenue and cost (i.e. profit). If MC is below MR, the firm can increase profit by producing more. If MC is above MR, the firm can decrease loss by producing less. Therefore, setting MC equal to MR is the optimal strategy for a perfectly competitive firm. A perfectly competitive firm will always aim to maximize its profit or minimize its loss by setting the marginal cost equal to marginal revenue. This is because in a perfectly competitive market, the firm has no control over the market price and must therefore produce at the level where its marginal revenue equals its marginal cost. This will ensure that the firm is producing the optimal quantity of output that maximizes its profit or minimizes its loss. Setting marginal cost above average cost would result in the firm incurring losses, while setting total cost minus total revenue at its maximum level is not a relevant concept for maximizing profit or minimizing loss in a perfectly competitive market. Creating a unique product is also not relevant in a perfectly competitive market, where firms produce homogeneous products.

A Perfectly Competitive Firm Will Always Maximize Its Profit or Minimize