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Chapter 8: Problem 3

Which of the following are the same at all levels of output under perfect competition? a. Marginal cost and marginal revenue b. Price and marginal revenue c. Price and marginal cost d. All of the above

Short Answer

Expert verified
Under perfect competition, the correct option is b. Price and marginal revenue, as they are the same at all levels of output. Marginal cost is not equal to marginal revenue or price at all levels of output; it equals them only at the profit-maximizing output level.

Step by step solution

01

Relationship between price and marginal revenue

In a perfectly competitive market, individual firms are said to be price takers as they have no control over the market price of the product. Therefore, in such a market, the marginal revenue (extra revenue earned by selling one more unit) is equal to the price (P) as the firm can sell any number of units at this price. So, Price (P) = Marginal Revenue (MR). // step 2: Identifying the relationship between marginal cost and marginal revenue under perfect competition //
02

Relationship between marginal cost and marginal revenue

For a perfectly competitive firm, the profit-maximizing output level is achieved when marginal cost (MC) equals marginal revenue (MR). However, this condition does not mean that MC and MR are the same at all levels of output. The firms adjust their output levels to make MC = MR, but they can be different when production levels change. // step 3: Identifying the relationship between price and marginal cost under perfect competition //
03

Relationship between price and marginal cost

In a perfectly competitive market, when a firm maximizes its profit, the condition MC = MR occurs. And since we know from step 1 that Price (P) = Marginal Revenue (MR), we can conclude that at the profit-maximizing output level, Price (P) = Marginal Cost (MC). However, this does not imply that P and MC are the same at all levels of output. // step 4: Answering the question and explaining the correct option(s) //
04

Selecting the correct option(s)

Based on our analysis in steps 1, 2, and 3, we can conclude the following relationships under perfect competition: Price (P) = Marginal Revenue (MR) However, we can't confirm that Marginal cost (MC) equals either marginal revenue (MR) or price (P) at all levels of output. Therefore, the correct option is: b. Price and marginal revenue

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