Profit-maximizing firms in a competitive market produce an output level where
A)marginal cost equals marginal revenue.
B)marginal cost equals average total cost.
C)marginal revenue is increasing.
D)price is less than marginal revenue.

Question

Quizplus · Accepted Answer

In a competitive market, firms are price-takers and face a horizontal demand curve. This means that the marginal revenue (MR) is equal to the price of the good. In order to maximize profits, the firm will produce at a level where marginal cost (MC) equals MR (which is the same as price in a competitive market). This is because producing more would result in a higher MC, reducing profits, while producing less would mean missing out on potential revenue. Therefore, option A is the correct choice. Option B is incorrect because the firm does not consider average total cost (ATC) when deciding on the output level. Option C is also incorrect because it does not necessarily hold true for all firms in a competitive market. Option D is incorrect because in a competitive market, price is always equal to MR.

Profit-Maximizing Firms in a Competitive Market Produce an Output Level