Answer:
b. The firm maximizes profit when price equals marginal cost
Explanation:
In a perfectly competitive market, firm accept market price and the price is the marginal revenue.
To maximize profit, the firm needs to produce where marginal revenue equals marginal cost. That is because
- if firm produces more than that, they are making a loss on last products (where the cost of production is higher than the revenue received on them).
- if firm produces less than that, they can make more money by producing more units to capture the discrepancy between the revenue and the cost (still lower than revenue) for those units.
- (Note: Marginal cost is increasing. Firm would of course continue to produce when it is decreasing. At some point it will start increasing)
Therefore firms will maximize profit where marginal cost equals price.
