Chapter 11R, Problem 4MCQ

To determine

The correct option for given situation where profit can be maximum for perfect competition.

Answer to Problem 4MCQ

Option a is correct answer.

Explanation of Solution

Explanation for correct option:

a.

In a perfect competition, firms are price takers instead of price setters as they cannot influence the prices of the product by selling less or more quantity of the product in the market.

  P

Price taking firms produces the optimum quantity at which they can maximize their profit. This is because they are the price taker; they have to sell their produces at the same price demanded by the customers. They can maximize their profit if total cost is minimum and at minimum ATC marginal revenues are equal to the prices. Therefore, option a is correct.

Explanation for incorrect options:

b.

Profitability for price taking firms cannot be assured if price of the product is equal to the average fixed cost. Therefore, option b is incorrect.

c.

Firm can earn profit if market price of the product is above average total cost but it cannot be ensured if market price is above average fixed cost. Therefore, option c is incorrect.

d.

Firm can earn profit for sure if price is greater than average total cost but it cannot be achieved in perfect competition scenario as firms are price takers and cannot charge higher value for their produces. Therefore, option d is incorrect.

e.

Profitability for price taking firms cannot be assured if price of the product is equal to the average variable cost because there is always fixed cost incurred by the firm. Therefore, option e is incorrect.

Economics Concept Introduction

Introduction: The price taking firms can reduce the cost of production if they produce the correct amount of products. In other words, profit can be maximized if quantity produced is at minimum cost.