Question

What conditions must hold if a profit-maximizing firm produces positive output in a competitive market?

Answer 1

The following three conditions must hold if a profit maximising firm produces positive level of output (say equilibrium output Q*) in a competitive market:

1) MR must be equal to MC at Q*.

2) MC should be upward sloping or rising at Q*.

3) In short run − Price must be greater than or equal to AVC. i.e. P ≥ AVC at Q*.

In long run − Price must be greater than or equal to LAC.