Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Marginal cost equals marginal revenue
B
Total revenue equals total cost
C
Average cost is at its minimum
D
Price is greater than average cost
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, a firm maximizes its profit when it produces the quantity of goods where its marginal cost equals the market price. Marginal cost is the cost of producing one more unit of a product, and when it is equal to the price, the firm is making the best use of its resources. For example, if a company finds that producing one more unit of a product costs $10, and the market price for that product is also $10, then the firm is in the ideal position to maximize profit. If the cost were higher than the price, the firm would lose money on that extra unit, and if the cost were lower, it could produce more to increase profit. Therefore, the key idea is to match marginal cost with market price to ensure the firm is operating efficiently.
Detailed Explanation
A firm maximizes profit when its marginal cost, the cost of producing one more unit, equals marginal revenue, the money earned from selling one more unit. Other options are incorrect because Some might think that breaking even, where total revenue equals total cost, is enough; People might believe that having the lowest average cost is the key.
Key Concepts
Marginal cost
Topic
Market Structures and Profit Maximization
Difficulty
easy level question
Cognitive Level
understand
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