ECONOMICS (CBSE/UGC NET)

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ECONOMICS

PROFIT

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Oscar sells bicycles in a perfectly competitive market. In the short run, at the quantity that equates marginal revenue and marginal cost, the market price is above Oscar’s average variable cost and below his average total cost. Oscar should
A
shut down his business
B
raise his price
C
produce at a loss because he is covering his variable costs
D
produce at a profit because he is covering his variable costs
Explanation: 

Detailed explanation-1: -To maximize profit, a short-run perfectly competitive firm will choose the profit maximization point where marginal cost equals marginal revenue. That’s because when marginal revenue is higher than marginal cost, the firm can increase revenue by increasing output.

Detailed explanation-2: -In a perfectly competitive market, firms can only experience profits or losses in the short run. In the long run, profits and losses are eliminated because an infinite number of firms are producing infinitely divisible, homogeneous products.

Detailed explanation-3: -The average revenue and marginal revenue for firms in a perfectly competitive market are equal to the product’s price to the buyer.

Detailed explanation-4: -Profits are therefore maximized when the firm chooses the level of output where its marginal revenue equals its marginal cost.

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