Each firm in a competitive industry finds its optimal quantity to produce by setting its marginal cost to be _______________ the market price.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, each firm is a price taker and must accept the market price as given. Therefore, in order to maximize profits, a firm will produce the quantity at which its marginal cost equals the market price. If the firm produces at a quantity where the marginal cost is greater than the market price, it will incur losses. On the other hand, if it produces at a quantity where the marginal cost is less than the market price, it could increase profits by producing more. Therefore, the optimal quantity is when the marginal cost is equal to the market price.

Each Firm in a Competitive Industry Finds Its Optimal Quantity