Question

What is the relationship between price and marginal cost of a firm under perfect competition?

Answer 1

1. In perfect competition, the firm is a price taker; it cannot set its price and must accept the market price.
2. To maximize profit, the firm produces output where its marginal cost equals the market price.
3. Therefore, the equilibrium condition for the firm is Marginal Cost (MC) = Price (P)

This ensures that the firm is producing the most profitable level of output.