Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.

Question

Philoid · Accepted Answer

There cannot be a positive level of output for profit maximizing firm when average revenue is not equal to marginal cost because the output will be produced at equilibrium, where marginal revenue is equal to marginal cost.

In case of a perfectly competitive market AR equals to MR and as AR is not equal to MC so MR will not be equal to MC. Hence there is no equilibrium and there cannot be any positive level of output.

We can understand this with help of following graph –

• If price is more than marginal cost (P > MC, Point H)

In given graph at output OQ1, the price is HQ1, which is more than the marginal cost is lQ1. As we can see that OQ1 is not profit-maximizing output because the firm can increase its profit level by expanding its output to OQ2, where price and marginal cost are L i.e P = MC

• If price is less than marginal cost (P < MC, Point M)

In the given graph when OQ3 quantity is sold at the prices NQ3 the marginal cost is MQ3. Here we can see that even at OQ3 the firm is not maximizing the profit because the profit can be maximized at OQ2.

So, there cannot be a positive level of output for profit maximizing firm when average revenue is not equal to marginal cost.