Question

Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.

Answer 1

There cannot be any positive level of output that a firm produces at which price is not equal to MC. Let us evaluate the following two cases where price is not equal to MC.

Case A: If P > MC

At output Oq₁, Price is Kq₁, while the MC is Lq₁. So, Oq₁ is not the profit maximising output. This is due to the fact that the firm can increase its profit level by expanding its output to Oq₂.

Case B: If P < MC

At output Oq₃, price is Hq₃ and MC is Gq₃. So, Oq₃ is not the profit maximising output. This is because the firm can increase its profit by reducing its output level to Oq₂.

Thus, at profit maximising point, price must be equal to MC and it cannot be greater or lesser than MC.