Question 7 of 25intermediate💡 UnderstandShort Answer3 marks

What conditions must hold if a profit-maximising firm produces positive output in a competitive market?

Correct Answer

If a profit-maximising firm produces positive output in a competitive market, three conditions must hold at that output level.

In the short run, the conditions are: (i) P = SMC (market price equals short-run marginal cost), (ii) SMC is non-decreasing at that output level, and (iii) P ≥\geq AVC (market price must be greater than or equal to average variable cost).

In the long run, the conditions are: (i) P = LRMC (market price equals long-run marginal cost), (ii) LRMC is non-decreasing at that output level, and (iii) P ≥\geq LRAC (market price must be greater than or equal to long-run average cost).

Exercise: EXERCISES | Q: 7 | (Page 15)
For More Understanding

Explanation

The textbook clearly specifies three conditions for profit maximization when output is positive, separately for short run and long run. In the short run, the firm must cover its variable costs (P ≥\geq AVC) to continue production. In the long run, the firm must cover all costs including normal profit (P ≥\geq LRAC). The marginal cost must be non-decreasing to ensure profit is maximized, not minimized.

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