Multiple Choice
In a market with a natural monopoly, at what price does the monopolist typically meet market demand in order to maximize profit?
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3. The Market Forces of Supply and Demand
Market Equilibrium
Multiple Choice
In a perfectly competitive market at equilibrium, what price will the firm charge?
A
The price set by the firm to maximize profit
B
The price above average total cost (ATC)
C
The price equal to marginal cost (MC)
D
The price below marginal cost (MC)
Verified step by step guidance1
Understand that in a perfectly competitive market, firms are price takers, meaning they accept the market price and cannot influence it.
Recall that profit maximization for a firm occurs where marginal cost (MC) equals marginal revenue (MR). In perfect competition, the price (P) equals marginal revenue (MR), so the condition becomes \(P = MC\).
Recognize that the firm will produce output where \(P = MC\) to maximize profit or minimize losses, because producing beyond this point would increase costs more than revenue.
Note that the price must be at least equal to the average total cost (ATC) for the firm to make a normal profit; if the price is below ATC, the firm incurs losses in the long run.
Conclude that at equilibrium in a perfectly competitive market, the firm charges a price equal to marginal cost (\(P = MC\)), which also aligns with the market equilibrium price.
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