If a purely competitive firm is producing at some output level less than the profit-maximizing output, then
A) price is necessarily greater than average total cost.
B) fixed costs are large relative to variable costs.
C) price exceeds marginal revenue.
D) marginal revenue exceeds marginal cost.

Question

Quizplus · Accepted Answer

If a purely competitive firm is producing at an output level less than the profit-maximizing output, then its marginal revenue must be greater than its marginal cost. Otherwise, it could increase profits by producing more units with a marginal cost lower than the marginal revenue. Therefore, the correct answer is D, marginal revenue exceeds marginal cost. Options A and B are not necessarily true in this scenario, and option C is not correct because in a purely competitive market, price is equal to marginal revenue.

If a Purely Competitive Firm Is Producing at Some Output