Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A firm operates where its marginal cost is equal to the market price, leading to zero economic profit.
B
A firm reduces production because the price is below average total cost, resulting in losses.
C
A firm increases production as long as marginal cost is below marginal revenue, maximizing its profit.
D
A firm maintains production unchanged even when marginal revenue is falling.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, a firm maximizes profit by producing the quantity of goods where its marginal cost equals marginal revenue. This means that the cost of producing one more unit of a product should be the same as the money earned from selling that unit. For example, if a bakery finds that making one more loaf of bread costs $2, and it can sell that loaf for $2, then it is at the profit-maximizing point. If the bakery were to produce less, it would miss out on potential profits, and if it produced more, it would lose money on each additional loaf. Therefore, the key idea is to find that balance where the cost to produce and the revenue from sales are equal.
Detailed Explanation
A firm maximizes profit by increasing production until the cost of making one more unit (marginal cost) equals the money it earns from selling that unit (marginal revenue). Other options are incorrect because This option suggests that a firm can make zero economic profit and still be maximizing profit; Here, the firm is losing money by producing less because the price is below costs.
Key Concepts
Profit Maximization
Marginal Revenue and Marginal Cost
Long-Run Equilibrium
Topic
Profit Maximization in Perfect Competition
Difficulty
easy level question
Cognitive Level
understand
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