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Chapter 14 HMWK

  1. Why does a perfectly competitive firm maximize revenues where P=MC? 
  2. Why is P=MR in this market type?
  3. Name a business you think belongs in this category.  Why? Be sure you think and write about all of the assumptions about firms in this industry.


A competitive firm is able to maximize profit when price equals marginal cost. Essentially, they are breaking even on that last unit, which means that they are fully utilizing their resources in this business venture.

 If MR > MC, they should increase output to capture sales opportunities since they will take in more money than it costs to produce the good. If MR < MC, then they should decrease output because they aren't selling enough to cover the increased cost of producing. When MR=MC they are most efficient.

 A childcare facility would be operating competitively when the marginal revenue received from enrolling additional children equals the marginal cost of hiring caregivers. Because there are laws that require a certain ratio of caregivers to children, there is a fine balance to take into account. Only one extra paying child may not cover the expense of a caregiver, but three possibly could.

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