Which of the quantity represents profit maximisation output for a firm operating under perfect competition?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: $q_4$
At output levels $q_1$ and $q_4$ , the market price is equal to the marginal cost. However, at the output level $q_1$ , the marginal cost curve is downward sloping. One of the essential conditions for profit maximisation under perfect competition is that Marginal cost must be non-decreasing (at $q_0$ i.e. where profit is maximum). Thus, $q_1$ cannot be a profit-maximising output level. In other words, output $q_1$ is not the equilibrium output because it is followed by MC<MR. By producing more than O$Q_1$ the producer can still add to profits.
At point B, the Output is $q_4$and it is the profit maximising output because it is followed by MC>MR. If he produces more than $q_4$, his profits will decline.