Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms maximize profit where marginal revenue equals marginal cost.
B
In the long run, firms can earn economic profits indefinitely.
C
The market price equals the minimum average total cost in long-run equilibrium.
D
Firms will produce at a level where price exceeds average total cost.
E
New firms can enter the market freely due to the absence of barriers.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, profit maximization occurs when a firm produces the quantity of goods where its marginal cost equals its marginal revenue. This means that the cost of producing one more unit of a product is the same as the money earned from selling that unit. For example, if a bakery finds that baking one additional loaf of bread costs $2 and selling it brings in $2, then they are at the profit-maximizing level of production. Additionally, firms in this market cannot influence prices and must accept the market price, which is determined by supply and demand. Therefore, the goal is to adjust production until the costs of making one more unit align perfectly with the revenue from selling that unit.
Detailed Explanation
In a perfectly competitive market, firms maximize profit when marginal revenue equals marginal cost. Other options are incorrect because This statement is misleading; This is incorrect because firms cannot earn economic profits forever in the long run.
Key Concepts
Profit Maximization in Perfect Competition
Long-run Equilibrium
Marginal Cost and Revenue
Topic
Profit Maximization in Perfect Competition
Difficulty
medium level question
Cognitive Level
understand
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