Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.
No, a profit-maximising firm in a competitive market will never produce a positive level of output in the range where the marginal cost is falling.
For a firm to maximise profits, the first condition requires that the market price equals the marginal cost (P = MC). However, this equality alone is not sufficient to determine the profit-maximising output level.
Consider an output level where the marginal cost curve is downward sloping and P = MC. At such an output level, for all output levels slightly to the left of this point, the market price is lower than the marginal cost. This implies that the firm's profit at an output level slightly smaller than the current output exceeds the profit at the current output level.
Since the firm can earn higher profits by reducing output, the original output level cannot be profit-maximising. Therefore, the profit-maximising output cannot lie in the range where marginal cost is falling.
This establishes the second condition for profit maximisation: the marginal cost curve must be upward sloping (rising) at the profit-maximising output level. The firm will only produce where P = MC and MC is rising.
Explanation
The textbook explains this through Condition 2 in section 4.3.2. Using Figure 4.3, it shows that at output level q1 where MC is falling and P = MC, the firm cannot be maximising profits. The reasoning is that profits at a slightly smaller output level exceed profits at q1, making q1 suboptimal. This is why the MC curve must slope upwards at the equilibrium output.