Chapter 58, Problem 1MCQ

To determine

The correct option that defines the condition at which perfectly competitive firm will maximize profit.

Answer to Problem 1MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

When marginal cost is equal to the marginal revenue then the total cost of production is minimum in a perfect competition. At this condition the perfectly competitive firm will earn maximum profit. Therefore, option d is correct

Explanation for incorrect options:

a.

When price or marginal revenue is equal to the marginal cost then only firm can maximize its profit. The firm can earn normal profit in long run. Therefore, option a is incorrect.

b.

Average revenue will decrease if marginal cost is increased. Marginal revenue and marginal cost should equate to earn maximum profit. Therefore, option b is incorrect.

c.

If marginal revenue is equal to total cost then firm will not earn even normal profit. Therefore, option c is also incorrect.

e.

If demand is equal to the supply then equilibrium is attained. To maximize profit it is not necessary that marginal revenue should equal to demand. This will increase the demand for labor. Therefore, option e is incorrect.

Economics Concept Introduction

Perfect Competition: In perfect competition, firms are the price takers where average total cost (ATC) is minimum to the point at which MC curve cuts the MR curve.