Question

4. If you are operating a business in a perfectly competitive market. You can sell as much as at the market price. Why can you not simply increase your profits by selling a highest quantity? (10 marks) Answer:

Answer 1

answer

A perfectly competitive market produces at MC=P to maximize profit or minimize losses as the MR=P and the profit is maximum for any firm at MR=MC

Profit is a sum of marginal profit

Marginal profit =MR-MC

the profit is maximum when the marginal profit is zero

0=MR-MC

MR=MC at the profit maximum

so a firm produces at MR=MC and a perfectly competitive firm has MR=P=MC so the firm produces at P=MC.

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What happens if the firm produces the maximum quantity,

The firm has horizontal MR curve and MC is upward sloping means as the firm produces more the MC increases if the firm produces above the level of MC=P then the profit decreases if firm does not increase the price and if firm increase rice then there will be no sell as the firm is a price taker.

so there are two effect

The firm will make losses or do not maximize profit or minimize losses.

The firm will not sell any output if it increases the price as well.