[Char143]

I am really confused on the topic of Price in a perfect competition market structure. In both Wiley and Ninja plus they say
“PRICE = Marginal Cost”

BUT then they say “price= marginal revenue”

So which is it?

In Wiley there is a question that asks ” In perfect competition, which of the following is always correct?
A. Price equals total revenue.

B. Price equals average total cost.

C. Price equals marginal cost.

D. Price equals marginal revenue.”

The answer is D, but I picked C.. I just didn’t know which it was between C & D (because I read that both are correct?).

It states the reason why C is INCORRECT: Incorrect..”In perfect competition, price does not always equal marginal cost. In perfect competition, price is also demand and marginal revenue. A firm in perfect competition would maximize short-run profit where marginal cost = price (or marginal revenue).”

And the reason why D is CORRECT: Correct..In perfect competition, price is always equal to (the same as) marginal revenue. In perfect competition, in the short run, each and every unit produced can be sold at the market price; therefore, price is also demand and marginal revenue.”

I still can’t understand it with these explanations. Please help

AUD - 84
BEC - 79
FAR - 78
REG - 79

I'm done! 🙏🏼

 

Licensed CPA

AUD (2/16)-84
REG (05/16)-69 Retake (7/16)-79 (ty ninja MCQ)
BEC-TBD
FAR-9/8/16

[Char143]

help 🙁

AUD - 84
BEC - 79
FAR - 78
REG - 79

I'm done! 🙏🏼

 

Licensed CPA

AUD (2/16)-84
REG (05/16)-69 Retake (7/16)-79 (ty ninja MCQ)
BEC-TBD
FAR-9/8/16

[thelatebloomer]

I have trouble with these types of questions, as they are highly theoretical and there are a lot of assumed conditions. Marginal cost is the change in total cost for increasing quantity by one unit, while marginal revenue is the change in total revenue by increasing quantity by one unit. They are not necessarily the same. In perfect competition, there is the possibility for firms to make normal profits, which means there's a difference between price and marginal cost to produce that profit. Conversely, when price is equal to marginal cost, a firm makes no profit. So I think the assumption you're having trouble with is whether firms in perfect competition are able to make a profit. They are, but in perfect competition they are considered normal profits instead of excess profits. Yes, profit is maximized when Price = Marginal Revenue = Marginal Cost. However, they are not always in this state. For a firm in perfect competition to maximize profits, marginal revenue and marginal cost would converge until they were the same, and normal profits are gained up to that point of convergence.

Does that help?

BEC: 88 (expired)
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FAR: October
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