Which one of the following statements for a firm's equilibrium in Perfect Competition is not correct ?
- A.The market price must be greater or equal to average variable cost in the short run.
- B.The market price must be equal to marginal cost.
- C.The market price must be equal to average cost in the long run.
- D.The marginal cost decreases at the equilibrium output.
Correct answer
Explanation
The correct answer is D, The marginal cost decreases at the equilibrium output. This statement is not correct, because at the equilibrium of a competitive firm marginal cost must be rising. A firm in perfect competition is a price taker, so the price it gets equals its marginal revenue. It maximises profit where price equals marginal cost, and the second condition is that the marginal cost curve must cut the price line from below. If marginal cost were still falling, producing one more unit would cost less than the price received, so the firm would gain by expanding output; that point cannot be an equilibrium. Option A is wrong to pick because in the short run the firm shuts down if price falls below average variable cost, so price must be at least AVC. Option B is wrong because price equal to marginal cost is the basic condition of equilibrium. Option C is wrong because free entry and exit in the long run leave only normal profit, so price equals minimum average cost. Exam tip: competitive equilibrium, P = MR = MC with MC rising; long run, P = minimum AC.
Practice Questions
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1. Income distance
2. Population
3. Demographic changes
4. Area
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- A.1-2-3-4
- B.1-2-4-3
- C.1-3-2-4
- D.4-3-2-1
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- D.Second Five-Year Plan
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- D.External Assistance
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Read the full explanation →The Nehru-Mahalanobis Strategy of Development was implemented for the first time by which one of the following Five-Year Plans?
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