Micro

Forms of Market

Medium

Which of the following is NOT a condition for profit maximization of a perfectly competitive firm in the short run?

The price 'p' must equal MC

Average revenue must be rising.

Price must be greater than the average variable cost (p > AVC)

Marginal cost must be non-decreasing at the profit maximizing level of output.

✅ Correct Option: 2

Option 1 -> This is a necessary first-order condition. In perfect competition, profit is maximized where P = MC.

Option 2 -> In perfect competition, Average Revenue (AR) equals price, which is constant (horizontal demand curve). AR being rising is NOT a condition for profit maximization.

Option 3 -> This is the short-run shutdown condition. The firm must cover average variable costs to continue operating.

Option 4 -> This is the second-order condition ensuring maximum (not minimum) profit at the equilibrium point.

Hence, Option 2 -> In a perfectly competitive market, the firm is a price taker, meaning it faces a horizontal demand curve at the market price. Average Revenue (AR) equals this constant price and remains flat, not rising. The actual conditions for short-run profit maximization are: (1) P = MC, (2) MC is rising/non-decreasing at equilibrium, and (3) P ≥ AVC to avoid shutdown. Average revenue being rising is neither a characteristic of perfect competition nor a requirement for profit maximization. -> correct

2025: 3 June Shift 2

Arrange the given statements in chronological order stating the implications of free entry and exit assumptions in a equilibrium market.

(A) Supply curve shifts rightward, however demand remains unchanged.

(B) At the prevailing market price, each firm is earning a supernormal profit and will attract some new firms.

(D) All firms in the market are earning normal profit, no more firms will have incentive to enter.