Question

The equilibrium of a firm under perfect competition will be determined when

• A. Marginal Cost > Average Cost
• B. Marginal Revenue > Average Cost
• C. Marginal Revenue > Average Revenue
• D. Marginal Revenue = Marginal Cost

Answer 1

The Correct Option is D

Step 1 — Recall the concept of perfect competition:
In perfect competition, there are a large number of buyers and sellers, homogeneous products, and free entry and exit of firms. A firm in this market structure is a price taker — it cannot influence the price, it can only decide how much to produce at the given market price.

Step 2 — Revenue concepts:
Under perfect competition:
- Average Revenue (AR) = Price
- Marginal Revenue (MR) = Price
Therefore, AR = MR = Price in this market.

Step 3 — Condition for equilibrium:
The firm’s equilibrium output is determined when:
1. Marginal Revenue (MR) = Marginal Cost (MC) → This is the first condition of equilibrium.
2. MC curve cuts the MR curve from below → This ensures stability, meaning that increasing production beyond this point would raise costs faster than revenue.

Step 4 — Interpretation:
At the point where MR = MC, the firm maximizes its profit (or minimizes loss, if the market price is below average cost). Producing more or less than this output would reduce profit.

Final Answer:
The correct option is (D) : Marginal Revenue = Marginal Cost.