Question

​If, for a perfectly competitive​ firm, if price exceeds the marginal cost of​ production, the firm should
A.
reduce its output.
B.
lower the price.
C.
increase its output.
D.
keep output constant and enjoy the above normal profit.

Answer 1

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

MR and Price are same in the perfect competition.

Corresponding to this condition, quantity is determined.

So when a a perfectly competitive​ firm, if price exceeds the marginal cost of​ production, the firm should increase its output until price and marginal cost becomes equal.

Hence option A is the correct answer.