Which of the following is true?
a. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its total revenues and total cost.
b. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its average revenue and average total cost.
c. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its average
revenue and average variable cost.
d. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its marginal revenue and marginal cost.
e. None of the above is true.
A perfectly competitive market is a market form that has many sellers and consumers. In such a market, the product is completely homogeneous in all the parameters and each party in the transaction has perfect knowledge. Such a market is free from the barriers of trade implying that new firms can freely enter the market and the existing ones can freely exit the market. The price that each firm charges for the homogenous product is determined by the industry and no firm has any control over the market price.
A. Firms in the perfect competition produce output with productive efficiency implying that the profit-maximizing output produced by them happens at the minimum point of the long-run average total cost curve. This productive efficiency is possible only in the long run rather than the short run. As such, the stated fact is not a characteristic of the perfectly competitive firm in the short run. This makes the option correct.
B. The existence of perfect information among the buyers and sellers is a necessary condition for a market to be classified as perfectly competitive. As such, the stated fact is a characteristic of perfect competition owing to which this option is an incorrect answer choice.
C. The existence of numerous sellers ensures that the market share of each firm is negligible and no firm can influence the industry-determined price. As such, each firm is a price taker. Thus, the stated fact in the option represents a characteristic of perfect competition owing to which the option is not a correct answer choice.
D. The equilibrium level of output (or say the profit-maximizing output) produced by the firms in perfect competition occurs where price (P) equals marginal cost (MC). Since the firms can sell any quantity at the given market P, the marginal revenue (MR) and the P are the same implying that the MR curve and P line are the same. As such, it can be said that the equilibrium in perfect competition requires the equality of MC and MR. Since the stated fact is a characteristic of the perfect competition, the option is not a correct answer choice
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