Question

A perfectly competitive firm is operating at an output level where price is greater than marginal cost. Which of the following is/are true?

• A. The firm should increase its output so as to maximize profit.
• B. The firm should reduce its output so as to maximize profit.
• C. The firm is neither making profit nor loss.
• D. The firm is incurring loss.

Answer 1

The correct option is A The firm should increase its output so as to maximize profit.

In a competitive market, the firm maximize it's profit when the market price of the firm is equal to average variable cost of the firm so that the firm earns normal profits in the long run.

Therefore, if price is more than the average variable cost then the firm should increase its output in order to maximize its profit.