Practicing Success
Practicing Success
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| Firm XYZ is operating in a perfectly competitive market where the prevailing price is Rs. 40. SMC of the firm, as calculated by the managers is Rs. 40 at output level of 25 units and is Rs. 48 at 28 units of output and keeps increasing and becomes greater than the price. So what according to you will be the profit maximizing level of output for the firm? (Assume that the price is greater than minimum AVC) |
28 units >28 units < 25 units 25 units |
| 25 units |
| In a perfectly competitive market, for profits to be maximum, three conditions must hold: 1. The price must be equal to MC 2. Marginal cost must be non-decreasing 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC). All the three conditions are fulfilled at output level of 25 units. |
