Answer to Question #297185 in Microeconomics for Bhawna

Question

How does a competitive firm determine its profit-maximizing level of output? Explain

Answer 1

Perfect competition occurs when many firms are selling a similar good to many buyers with perfect information about the market.  Under perfect competition, a firm is a price taker of its good since no any of the firms can individually influence the price of the commodity to be purchased or sold . As it is the desire of each perfectly competitive firm, they choose each of their output levels to maximize their profits.    The main aim for a perfectly competitive firm in maximizing its profits is to compute the optimal level of output at which its Marginal Cost (MC) = Market Price (P). The profit maximization point is where MC equals MR or P.