Question

Question: Determine the profit maximizing price and quantity of resources in factor markets under perfect and imperfect competition by use of marginal analysis.

I understand that firms will maximize profit or minimize loss by producing the output where marginal revenue equals marginal cost; however, does that apply to perfect and imperfect?

I just feel like the answer requires more than the firms desire for MR = MC.

Answer 1

Under Perfectly competitive market , Average Revenue( AR)= Marginal Revenue.  In long run equilibrium , under firms perspective,  profit maximization it is achieved at the point where ATC is at  its lowest point, where MR=MC. If MR>MC, then firm will be able to sell it for more than its cost , therefore the firm will continue to do it until MR=MC, if  MR < MC, costs are higher than the selling price  for the firm , therefore the profit maximizing output and price is achieved when MR= MC. This is depicted below:

Under Imperfect competitive market,MR is a downward sloping curve and twice the slope of Demand curve as depicted below. Marginal Revenue curve splits the demand curve into two halves. The marginal Cost curve is flat and profit maximization quantity of output   is achieved at this point where MR= MC, but the maximum price will be determined by looking at the demand curve ( willingness to pay ) at P1 , this is depicted in the below figure.