Question

Show that a perfectly competitive firm maximises its profit only when $price=MC$.

Answer 1

A perfectly competitive firm maximizes its profit only when price=AR=MC.if output level is beyond the equilibrium level profits tend to shrink. In this case addition to total variable cost incurred for producing one more unit beyond equilibrium is greater then additional total revenue. So (TR-TVC) tends to shrink.If output level is below the equilibrium level profits tend to shrink. In this case reduction in total variable cost incurred for producing one less unit below the equilibrium is lesser than reduction in total revenue. So (TR-TVC) tends to shrink.