Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm is maximizing its profit at this output level.
B
The firm should reduce output to increase profits.
C
The firm is incurring losses and should shut down.
D
The firm is producing too much and should raise prices.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm operates in a perfectly competitive market and finds that its marginal cost equals the market price, it can conclude that it is producing at the optimal level of output. In this situation, the firm maximizes its profit because it is not missing out on any opportunities to earn more. If the marginal cost were lower than the market price, the firm could increase its profit by producing more, while if the marginal cost were higher, it would be better off producing less. For example, if a firm’s marginal cost is $10 and the market price is also $10, it indicates that every additional unit produced is worth exactly the cost to produce it, meaning the firm is neither losing nor gaining from producing that unit. Therefore, the firm is efficiently using its resources at this production level.
Detailed Explanation
When a firm's marginal cost is equal to the market price, it means the firm is producing the right amount. Other options are incorrect because Some might think reducing output will help profits, but that's not true here; It's a common mistake to think that if a firm is not making money, it should shut down.
Key Concepts
Profit Maximization in Perfect Competition
Marginal Cost and Price Relationship
Market Structures
Topic
Market Structures and Profit Maximization
Difficulty
easy level question
Cognitive Level
understand
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