A perfectly competitive firm will maximize profit when the quantity produced is such that the
A) firm's total revenue is equal to total cost.
B) firm's marginal revenue is equal to the price.
C) firm's marginal revenue is equal to its marginal cost.
D) price exceeds the firm's marginal cost by as much as possible.
E) firm's marginal revenue exceeds its marginal cost by the maximum amount possible.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm is a price taker and can sell any quantity at the market determined price. Therefore, the marginal revenue (MR) curve is horizontal at the market price. The firm will maximize its profit by producing the quantity where MR=MC (marginal cost). This is because producing any more or any less than this quantity will decrease profit. At the profit-maximizing quantity, the firm's total revenue (TR) will exceed its total cost (TC) by the maximum amount possible. Therefore, A) is not correct as it only covers the break-even point, and D) and E) overstate the condition by using the term "as much as possible" or "maximum amount," which may not always be the same for every firm.

A Perfectly Competitive Firm Will Maximize Profit When the Quantity