The correct answer is Option (3) → Price must be less than the average cost.
For a firm operating in a perfectly competitive market, the conditions for profit maximization are crucial. A firm maximizes its profit where its Marginal Revenue (MR) equals its Marginal Cost (MC). In a perfectly competitive market, the firm is a price-taker, meaning its Price (P) is equal to its Marginal Revenue (MR) and Average Revenue (AR). Therefore, the profit maximization conditions for a perfectly competitive firm are:
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Price (P) = Marginal Cost (MC): The firm produces at an output level where the market price equals the additional cost of producing the last unit.
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Marginal Cost (MC) must be non-decreasing (or rising) at the point of intersection with Price: This ensures that the firm is at a profit-maximizing point and not a loss-minimizing point (or a profit-minimizing point if MC was falling).
Now, let's evaluate each statement:
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The price must equal to MC. This is a correct condition for profit maximization in a perfect market (P=MC).
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Marginal cost must be non-decreasing. This is also a correct condition. It ensures that the firm is at the peak of its profit curve.
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Price must be less than the average cost. Incorrect. If the Price (P) is less than the Average Cost (AC), it means that the firm is making an economic loss (Total Revenue < Total Cost). A firm aims to maximize profits, or at least break even in the long run. Operating at a loss (P < AC) is certainly not a condition for profit maximization. In fact, if P < Average Variable Cost (AVC) in the short run, the firm would shut down, and if P < AC in the long run, the firm would exit the industry. Therefore, this statement is an incorrect condition for profit maximization.
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Price must be greater than the average cost. If Price (P) is greater than Average Cost (AC), the firm is earning supernormal profits. While this is a desirable outcome for a profit-maximizing firm, especially in the short run, it is not a necessary condition for profit maximization in all cases. In the long-run equilibrium of a perfectly competitive market, firms earn only normal profits, meaning P = AC. However, a firm producing where P = MC could be making profits, breaking even, or even making losses (if P > AVC but < AC) depending on the price level relative to its average costs. This statement describes a result of profit maximization when positive profits are made, rather than a universal condition for the act of maximizing profit.
Out of the given options, Option 3 is most appropriate as "Price must be less than the average cost" clearly implies losses, which is contrary to the goal of profit maximization.
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