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.
It is not possible for any perfect competitive firm to produce a positive level of output in a range where MC is falling. This is because according to one of the conditions of profit maximisation MC curve should be positive at the equilibrium level of output.
Let us take an example:
At point Z price equal to MC but MC is falling and is negatively sloped. For any level of output more than Oq0 the firm facing priceMC which implies that the profit can be maximised by increasing the output level further. Hence the point E is the equilibrium point where a profit maximising firm would operate and produce Oq1 units of output and its profit will be maximized.
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Quantity Sold TR (Rs.) TC (Rs.) Profit 0
1
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5
6
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Price (Rs.) SS1 (units) 0
1
2
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5
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7
80
0
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6
8
10
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