IGCSE Economics Paper-1: Specimen Questions with Answers 3 - 3 of 10

Question number: 3

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Is it possible to maximise profits for a firm operating in an imperfect market? Explain it

Explanation

  • In an imperfect market aim of each firm is to maximise profits. Firms operating in an imperfect market will sell more units of a good by lowering the price. Therefore, average revenue (AR) and marginal revenue (MR) curves are downward sloping from left to right.

  • A firm under imperfect competition, produces output up to the level where marginal revenue is equal to marginal cost, i. e. and MC curve cuts MR curve from below. If marginal cost exceeds marginal revenue, the firm will increase its profits by reducing units of outputs till . Profits are maximum at that level of output.

  • This can be illustrated by a diagram. In the diagram a firm is in equilibrium at point E. At point E, curve curve and MC curve cuts MR curve from below. The firm earns maximum profits equal to the shaded area ABNP.

Image of Average cost

Image of Average Cost

At price OP, average revenue is equal to AM and average cost is equal to BM. Profits are equal to . OM is the profit maximising output of the firm.

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