Which of the following is true for a purely competitive firm in short-run equilibrium?
A) The firm is making only normal profits.
B) The firm's marginal cost is greater than its marginal revenue.
C) The firm's marginal revenue is equal to its marginal cost.
D) A decrease in output would lead to a rise in profits.

Question

Quizplus · Accepted Answer

In short-run equilibrium, a purely competitive firm produces at the output level where marginal revenue (MR) equals marginal cost (MC). This is because in perfect competition, the firm is a price taker, meaning it must accept the market price. Therefore, the firm cannot set a price higher than the market price and must sell all its output at the market price. This means that the firm's marginal revenue is equal to the market price. Given this, if the firm were to increase its output, its marginal cost would rise above its marginal revenue, causing the firm to lose money on each additional unit produced. Conversely, if the firm were to decrease its output, its marginal cost would be less than the market price, resulting in lost revenue. Thus, the firm has no incentive to change its output level as it is producing at the profit-maximizing level where MR = MC.

Which of the Following Is True for a Purely Competitive