Answer :
To determine how a perfectly competitive firm maximizes its profit in the short run, let's explore the concepts associated with a perfectly competitive market.
1. Perfectly Competitive Market Characteristics:
- Numerous buyers and sellers.
- Homogeneous (identical) products.
- Free entry and exit in the long run.
- Perfect information.
- No control over the price (price takers).
2. Profit Maximization in the Short Run:
- The firm aims to maximize its profit by producing the quantity where Marginal Cost (MC) equals Marginal Revenue (MR). For perfectly competitive firms, the price (P) equals Marginal Revenue (MR) because the firm can sell additional units at the market price without affecting that price.
3. Shutdown Condition in the Short Run:
- A firm will decide to shut down if the revenue it earns from producing is less than its variable costs. Thus, it will continue operating if the price (P) is at least equal to the average variable cost (AVC).
Now consider the options in the question:
a. P = MC:
- In a perfectly competitive market, firms maximize profit where Price (P) is equal to Marginal Cost (MC). This is because at this point, the firm is covering all its variable costs and making the maximum possible profit.
b. FC = 0:
- Fixed Costs (FC) being zero is not required for profit maximization in the short run. Fixed costs only influence total costs and not the point of profit maximization.
c. ATC = 0:
- Average Total Cost (ATC) being zero is not realistic. Profit maximization focuses on marginal costs, not average costs.
d. VC = 0:
- Variable Costs (VC) being zero is not possible for a firm in the short run, as producing any output incurs variable costs.
e. AFC = MC:
- Average Fixed Cost (AFC) is not relevant in determining the profit-maximizing output level in the short run for a perfectly competitive firm. The focus is on Marginal Cost (MC).
Given these explanations and understanding, the correct answer is:
a. P = MC
This choice signifies that a perfectly competitive firm maximizes its profit in the short run when the price equals the marginal cost.
1. Perfectly Competitive Market Characteristics:
- Numerous buyers and sellers.
- Homogeneous (identical) products.
- Free entry and exit in the long run.
- Perfect information.
- No control over the price (price takers).
2. Profit Maximization in the Short Run:
- The firm aims to maximize its profit by producing the quantity where Marginal Cost (MC) equals Marginal Revenue (MR). For perfectly competitive firms, the price (P) equals Marginal Revenue (MR) because the firm can sell additional units at the market price without affecting that price.
3. Shutdown Condition in the Short Run:
- A firm will decide to shut down if the revenue it earns from producing is less than its variable costs. Thus, it will continue operating if the price (P) is at least equal to the average variable cost (AVC).
Now consider the options in the question:
a. P = MC:
- In a perfectly competitive market, firms maximize profit where Price (P) is equal to Marginal Cost (MC). This is because at this point, the firm is covering all its variable costs and making the maximum possible profit.
b. FC = 0:
- Fixed Costs (FC) being zero is not required for profit maximization in the short run. Fixed costs only influence total costs and not the point of profit maximization.
c. ATC = 0:
- Average Total Cost (ATC) being zero is not realistic. Profit maximization focuses on marginal costs, not average costs.
d. VC = 0:
- Variable Costs (VC) being zero is not possible for a firm in the short run, as producing any output incurs variable costs.
e. AFC = MC:
- Average Fixed Cost (AFC) is not relevant in determining the profit-maximizing output level in the short run for a perfectly competitive firm. The focus is on Marginal Cost (MC).
Given these explanations and understanding, the correct answer is:
a. P = MC
This choice signifies that a perfectly competitive firm maximizes its profit in the short run when the price equals the marginal cost.
