Question

Which of the following conditions must hold for a firm to maximise its profit? (A) Price = Short run marginal cost
(B) Short run marginal cost curve is non-decreasing
(C) Price \(\leq\) Marginal cost
(D) Price \(\geq\) Average variable cost

• A. (B), (C) and (D) only
• B. (A), (B) and (C) only
• C. (A), (B), (C) and (D)
• D. (A), (B) and (D) only

Hint:

Profit maximisation requires: \(P = MC\) (equilibrium). MC rising at equilibrium. \(P \geq AVC\) (shutdown condition).

Answer 1

The Correct Option is D

Step 1: Profit Maximisation Principle.
- Profit is maximised when Marginal Revenue (MR) equals Marginal Cost (MC), i.e., \(MR = MC\). In a perfectly competitive market, MR is equivalent to Price (P), hence \(P = MC\) is the condition for profit maximisation.
- For profit maximisation, the MC curve must be upward sloping at the equilibrium point.
- A firm will only continue production in the short run if the price covers at least the Average Variable Cost (AVC), i.e., \(P \geq AVC\).
Step 2: Statement Analysis.
- (A) Accurate: \(P = MC\) is the profit maximisation condition.
- (B) Accurate: The MC curve needs to be upward sloping.
- (C) Inaccurate: Profit maximisation requires equality, not \(P \leq MC\).
- (D) Accurate: This is the condition for continued production in the short run.
Step 3: Deduction.
Therefore, the correct statements are (A), (B), and (D).
Final Answer: \[\boxed{(A), (B), (D)}\]