CFA Practice Question

CFA Practice Question

A profit-maximizing firm selling in a purely competitive market should
A. try to sell all the output it can produce, so its fixed cost per unit will keep falling.
B. try to produce and sell all units of output for which marginal cost per unit is less than the market price.
C. try to produce and sell that quantity of output at which marginal cost per unit has reached its minimum level.
Explanation: As long as the firm's marginal cost is lower or equal to the market price, the firm will stay in business. The firm stops expanding output at the point where price and marginal cost are equal.

User Contributed Comments 3

User Comment
shasha whether the firm could stay in business depands on whether its AVC (ATC for L-run) is lower than market price, but not depand on MC. C is the correct answer with the reason: a point of max. profit is reached at MC = MR = P when you try to sell out all units with MC less than P.
smillis in a competitive market firms produce to where the last widget's cost MC=MR=P. Therefore at the margin (the last produced widget), the firm will produce where MC=MR=P and not stop before then.
thekapila but if firm try to produce below MR.
MR > MC thats margin for new entries that can invite new entries as its a purely competitive market. so new entry will eat there margin.
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