CFA Practice Question

CFA Practice Question

Which one of the following is a feature of a price-taker market but not a price searcher with low entry barriers market?
A. Profits are maximized by setting MR = MC.
B. Profits are maximized by setting P = MC.
C. Positive economic profits to firms if P > ATC.
Explanation: For a price searcher, P > MC.

User Contributed Comments 9

User Comment
rhardin But price-takers can't set the price, so B can't be right.
Yohan3109 hey its true they cant set the price but if the set the cost so marginal cost to equate the price then profits are maximized under economie theory, i don't like economy and specialy the theory driven them
atoy P = MR so B is the only answer that is consistent with the argument in the question
thammy B is right because it P goes any lower, the price-taker will go out of business. So their "maximized profit" price is always equal to MC due to the industry nature.
parry89 P=MR=MC for a price taker but not for a price searcher.
Kashi2010 To make zero economic profits (undepur competition) a firm should operate at MR = MC.

They cannot SET the price, since they are price takers, but since MR = MC, and P = MR I can see that P = MC, for price takers.

For price searchers P > MC.
MaresaJaden This one was tricky.
Mikehuynh For price taker => profit maximization as P=MC=MR coz no control over price
For price searcher => P>MC=MR
marrilynne2 has this not got to do with the fact that the price taker demand curve is horizontal i.e. max price reached and price searcher demand curve kinked or vertical i.e price unlimited
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