The profit-maximizing behaviour for a price-taking firm requires it to operate where:Multiple ChoiceP = TR = TC.P = MC = AVC.P = MC = AFC.P = MR = MC = AFC.
Question
The profit-maximizing behaviour for a price-taking firm requires it to operate where:
Multiple Choice
- P = TR = TC.
- P = MC = AVC.
- P = MC = AFC.
- P = MR = MC = AFC.
Solution
The profit-maximizing behaviour for a price-taking firm requires it to operate where: P = MR = MC.
Here's why:
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P stands for Price. In a perfectly competitive market, a price-taking firm accepts the market price as given. It has no control over the price.
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MR stands for Marginal Revenue. This is the additional revenue that a firm receives from selling one more unit of a good. For a price-taking firm, the price is equal to the marginal revenue (P = MR) because the price doesn't change no matter how many units are sold.
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MC stands for Marginal Cost. This is the cost of producing one more unit of a good.
In order to maximize profit, a firm should produce up to the point where the marginal cost of producing one more unit is equal to the marginal revenue gained from selling one more unit (MC = MR).
So, the correct answer is P = MR = MC.
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