Suppose the wheat market is perfectly competitive. As such which of the following would be true?...

Suppose the wheat market is perfectly competitive. As such which of the following would be true? A. The market will maximize welfare for economic agents. B. The market will provide economic profits to all the sellers. C. The market will maximize consumer surplus and minimize producer surplus. D. All of the other answers are incorrect E. The market will minimize total cost.

Expert Solution

A perfectly competitive firm is a price taker (it takes market price as given) and to maximize profit, it produces at the point where market price = MC. If at the profit maximizing quantity, price is less than the firm's ATC, then the firm makes loss in the short run. If at the profit maximizing quantity, market price is greater than the ATC (which means Total revenue > total cost),then the firm makes economic profit in the short run. So, if the market is perfectly competitive, you can't be sure about wheather each firm is making economic profit or loss if you don't know about the position of the firm's ATC curve.

Each perfectly competitive seller faces perfectly elastic demand curve for its product. Each individual acts according to their own self interest and is led by an 'invisible hand' to a course of action that maximizes welfare for economic agents. Only in perfect competition, total surplus is at it's maximum.

Answer: option A

Rahul Sunny answered 8 months ago

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