What conditions must hold if a profit-maximising firm produces positive output in a competitive market?
The following three conditions must hold if a profit maximising firm produces positive level of output (say equilibrium output Q)in a competitive market.
1. MR must be equal to MC at Q*
2. MC should be upward sloping or rising at Q*
3. In short run – Price must be greater than or equal to AVC. i.e. P at Q*
In long run – Price must be greater than or equal to LAC.
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Suppose there are 20 consumers for a good and they have identical demand functions:
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The following table shows the total revenue and total cost schedules of a competitive firm. Calculate the profit at each output level. Determine also the market price of the good.
Quantity Sold TR (Rs.) TC (Rs.) Profit 0
1
2
3
4
5
6
70
5
10
15
20
25
30
355
7
10
12
15
23
33
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Price (Rs.) SS1 (units) 0
1
2
3
4
5
6
7
80
0
2
4
6
8
10
12
14 - Q:-
Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.
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