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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

Which condition holds for a perfectly competitive firm in long-run equilibrium?

In long-run equilibrium price equals both marginal cost and long-run average cost, so the firm operates at the minimum of its long-run average cost curve. Free entry removes supernormal profit, and profit maximisation requires price to equal marginal cost.

  1. APrice exceeds marginal cost, giving a positive mark-up
  2. BPrice equals marginal cost and long-run average cost, with the firm at the minimum of its LRACCorrect
  3. CMarginal revenue exceeds price because of entry
  4. DPrice equals marginal cost but exceeds average cost, so profit is supernormal
  5. Price equals average cost but marginal cost is below price

Explanation

Free entry and exit drive supernormal profit to zero, so P = AR = LRAC. Profit maximisation requires P = MC. MC cuts LRAC at its minimum, so the firm produces at minimum efficient scale, achieving productive and allocative efficiency.

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