Which one of the following statements for a firm’s equilibrium in Perfect Competition is not correct ?
The market price must be greater or equal to average variable cost in the short run.
The market price must be equal to marginal cost.
The market price must be equal to average cost in the long run.
The marginal cost decreases at the equilibrium output.
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-2 – 2024
Let’s evaluate the statements:
A) The market price must be greater or equal to average variable cost in the short run: Correct. A firm continues to produce in the short run only if the price is at least equal to the average variable cost (P ≥ AVC). If P < AVC, the firm minimizes losses by shutting down. B) The market price must be equal to marginal cost: Correct. P = MC is the profit-maximizing (or loss-minimizing) condition for a firm in perfect competition. C) The market price must be equal to average cost in the long run: Correct. In the long run equilibrium of a perfectly competitive market, entry and exit of firms ensure that price equals the minimum average total cost (P = MC = ATC), resulting in zero economic profit for all firms. D) The marginal cost decreases at the equilibrium output: Incorrect. For the equilibrium at P=MC to be stable and represent profit maximization, the MC curve must be rising at the point of intersection with the MR (Price) line. If MC were decreasing at equilibrium, producing more would increase profit (or decrease loss) because the cost of the next unit would be less than the revenue it generates (P). Firms produce on the upward-sloping portion of their MC curve above the AVC curve.