Question

Assume that a competitive firm has U-shaped cost curves and maximises short-run profits by producing a positive quantity of output. Which of the following could be true at that level of output in the short run?

A. p = MC

B. New firms enter if profit>0

C. Profit<0

D. Both a and c are correct, but b is not.

E. a, b, c are all correct.

Answer 1

Answer: A. P = MC

A firm maximizes profit at the level of output at which the marginal cost(MC) is equal to the marginal revenue(MR). i.e., the additional cost for the production of an additional output is equal to the additional revenue for the sale of an additional output. A firm in perfectly competitive market is a price taker, i.e., takes the market price as given. Therefore the firm's marginal revenue(MR) is equal to the market price.

Hence,  a competitive firm that has U-shaped cost curves and maximises short-run profits by producing a positive quantity of output, the following thing happens at the profit-maximizing level of output for that firm,

MC = MR = P

Or, P = MC

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