The correct answer is D. Only 3.
In perfect competition, a firm is a price taker, which means that it cannot influence the market price of its product. The firm’s marginal revenue curve is equal to its demand curve, which is horizontal at the market price. The firm’s marginal cost curve intersects its average cost curve at the minimum point of the average cost curve. At this point, the firm is producing at the level of output where marginal cost is equal to marginal revenue, and average cost is at a minimum. This is the firm’s short-run equilibrium.
Option 1 is incorrect because average cost does not need to equal average revenue in perfect competition. The firm’s average revenue curve is horizontal at the market price, but the firm’s average cost curve may be above or below the market price.
Option 2 is incorrect because marginal cost does not need to equal average cost in perfect competition. The firm’s marginal cost curve intersects its average cost curve at the minimum point of the average cost curve, but the firm’s average cost curve may be above or below the market price.
Option 3 is correct because marginal revenue must equal marginal cost in perfect competition for the firm to be in equilibrium. If marginal revenue is greater than marginal cost, the firm can increase its profits by producing more output. If marginal revenue is less than marginal cost, the firm can increase its profits by producing less output.
Option 4 is incorrect because average cost does not need to equal marginal cost in perfect competition. The firm’s marginal cost curve intersects its average cost curve at the minimum point of the average cost curve, but the firm’s average cost curve may be above or below the market price.