Question

Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.

Answer 1

It is not possible for any perfect competitive firm to produce a positive level of output in a range where MC is falling. This is because, according to one of the conditions of profit-maximisation, MC curve should be upward sloping or the slope of MC curve should be positive at the equilibrium level of output.

Let us take an example:

At point Z price is equal to MC, but MC is falling and is negatively sloped. For any level of output more than Oq₀, the firm is facing price > MC, which implies that the profit can be maximised by increasing the output level further.

Hence, the point ‘E’ is the equilibrium point, where a profit maximising firm would operate and produce Oq₁ units of output and its profit will be maximised.