Question

6. In perfect competition the profit is maximized when the price is equal to:

7. The minimum or short-term closing price is found when:

Answer 1

6) price should be equal to marginal cost. This is because in perfect competition the demand curve is horizontal for a single firm. It means that the price is fixed by the market and therefore the firm has to use its marginal cost to determine how much to produce. Therefore price should be equal to marginal cost for profit maximization

7) minimum short term closing price is the minimum of average variable cost. In the short run if the price falls below the minimum of average variable cost there is no production and firm shuts down.