Question

7) In order to maximize profits, the firm should adjust its output level to that point at which marginal

cost equals average revenue. This statement is true for

1. perfect competition

2. monopoly

3. monopolistic competition

4. oligopoly

A) 2 and 3

B) 2, 3, and 4

C) 1 and 3

D) 1 only

Answer 1

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

In this case MR=AR=price

A monopoly firm is a single seller because there are barriers to entry. In a pure monopoly industry, there is a single firm. The barriers to entry are those factors which lead to the restriction of entry by the new firms. These are patent laws that restrict the entry of new firms. License and copyrights are also an example of barriers to entry.

A monopolist firm and monopolistically competitive firm profit-maximizing condition are

MR=MC

Corresponding to this condition quantity is determined and corresponding to this quantity price are determined on the demand curve.

In this case price and MR are different, so AR is also different.

Hence it can be said that in order to maximize profits, the firm should adjust its output level to that point at which marginal

cost equals average revenue. This statement is true for perfect competition only.

Hence option d is the correct answer.