Multiple Choice
In a purely competitive market, what is the shape and position of the marginal revenue curve for an individual firm?
106
views
3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In the short run, a perfectly competitive firm will:
A
Always earn positive economic profits
B
Restrict output to increase market price
C
Produce where marginal cost equals marginal revenue, even if it incurs losses
D
Set its price above marginal cost to maximize profit
Verified step by step guidance1
Understand the characteristics of a perfectly competitive firm: it is a price taker, meaning it cannot influence the market price and must accept it as given.
Recall the profit-maximizing rule for any firm: produce the quantity where marginal cost (MC) equals marginal revenue (MR). In perfect competition, MR equals the market price (P).
Recognize that in the short run, the firm will produce where \(MC = MR = P\), even if this results in economic losses, as long as the price covers average variable costs (AVC).
Note that the firm does not restrict output to increase the market price because it is a price taker and cannot influence the market price by changing its own output.
Understand that the firm will not set price above marginal cost because in perfect competition, price equals marginal cost at the profit-maximizing output level.
Related Videos
Related Practice
