Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P MC. Marginal cost is normally shaped (U-shaped). The firm:
A)is currently maximizing profit since it is charging a price higher than marginal cost.
B)could increase profit by lowering the level of output.
C)could increase profit by increasing the level of output.
D)cannot increase profit without raising price.

Question

Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped). The firm:
A)is currently maximizing profit since it is charging a price higher than marginal cost.
B)could increase profit by lowering the level of output.
C)could increase profit by increasing the level of output.
D)cannot increase profit without raising price.

Quizplus · Accepted Answer

In a perfectly competitive market, firms maximize profit where price equals marginal cost (P = MC). If the price is greater than marginal cost (P > MC), the firm can increase its output to raise its profit, moving closer to the point where P = MC.

Suppose That, at the Current Level of Output, a Firm