Question

A perfectly competitive firm will maximize profit or minimize losses in the short run by producing at the point where:

Answer 1

Answer:

The correct answer is option C.

Explanation:

A perfectly competitive firm faces a horizontal line demand curve at the market-determined price. This demand curve also represents average revenue and marginal revenue.  

The firm is able to maximize profits or minimize loss at the point where the marginal cost is equal to the price or marginal revenue and the price is such that the average fixed cost is being covered.  

In the short run, some costs are fixed while others are variables, a firm is able to minimize losses if the price is greater than AFC. But in the long run, all costs are variable so price should be either higher than or equal to ATC to maximize profits and minimize losses.