Can there be a positive level of output that a profit maximizing firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
If market price is not equal to marginal cost, it means price is either greater than MC (P > MC) or price is less than MC (P < MC). If P > MC, then a profit maximizing firm can increase profit by increasing its output till P becomes equal to MC. This way firm can maximise its profit. If P < MC, producing additional output beyond P = MC output level will mean losses to the firm since rising MC becomes higher than MR (i.e., P). Hence in a competitive market, a profit maximizing firm's, profit is maximum when price (MR) = MC and after this MC is greater than MR (i.e., P).
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