Question

Which of the following is not a condition at the level of output where profit is maximised?

• A. Market price = marginal cost
• B. Marginal cost is decreasing
• C. In the short run, the market price $\ge$ average variable cost
• D. In the long run, the market price $\ge$ average cost

Answer 1

The correct option is B Marginal cost is decreasing

Profit maximization is achieved when, the marginal revenue is equal to average cost and if MC and MR are not equal then the firm will benefit by increasing or decreasing output.

It is also essential that the MC curve cut the MR curve from below to ensure an optimum quantity is produced.

Lastly the price must exceed or be equal to the average variable cost (thus partly contributing to the fixed costs), in order for the firm to continue producing in the short run.