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

Which condition holds for a typical firm in long-run equilibrium under perfect competition?

Price equals marginal cost and also minimum long-run average cost. Profit maximisation sets P = MC, and free entry and exit eliminate supernormal profit so price equals average cost, which only happens at the minimum point of the long-run average cost curve.

  1. APrice equals marginal cost, which exceeds average total cost
  2. BPrice is above marginal cost and average total cost equals marginal revenue
  3. CPrice equals marginal cost and equals minimum long-run average costCorrect
  4. DMarginal cost equals marginal revenue but price exceeds minimum average cost
  5. Price equals average variable cost only

Explanation

Profit maximisation requires P = MR = MC. Free entry and exit drive economic profit to zero, so P = average cost. This occurs at minimum LRAC, where LRAC = MC. Hence P = MC = minimum LRAC, giving productive and allocative efficiency.

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