In which of the following market structure price is equal to marginal cost?

Question

Accepted Answer

The correct option is 2: In **Perfect Competition**, price (P) is always equal to Marginal Revenue (MR) because the firm is a price taker; it must accept the market price and can sell any quantity at that price without affecting it. The profit-maximizing condition for any firm in any market structure is to produce where Marginal Revenue (MR) equals Marginal Cost (MC). Therefore, in the context of perfect competition, where $P = MR$, the profit-maximizing condition of $MR = MC$ becomes $\mathbf{P = MC}$. This equality ($P = MC$) is the hallmark of allocative efficiency, ensuring that resources are distributed such that the price consumers are willing to pay (which reflects the benefit to society) is exactly equal to the cost of producing the last unit (the cost to society). Furthermore, in the long run under perfect competition, competitive pressure drives the firm to produce at the minimum point of its Average Total Cost (ATC) curve, achieving both productive and allocative efficiency. The incorrect option is 1: In a **Monopoly**, the firm is the sole seller and faces a downward-sloping demand curve, meaning it must lower its price to sell more units. As a result, Marginal Revenue (MR) is always less than Price ($MR \< P$). Although a monopolist maximizes profit where $MR = MC$, because $P \> MR$, it follows that $P \> MC$. The incorrect option is 3: **Oligopoly** is a market structure dominated by a few large firms, characterized by interdependence. Like a monopoly, these firms typically have market power and face downward-sloping demand curves. Therefore, their profit maximization generally occurs where $P \> MR$, leading to the condition where $P \> MC$. The incorrect option is 4: **Monopolistic Competition** involves many firms selling differentiated products. Because the products are unique (or perceived as such), the firms have a small degree of market power, resulting in a downward-sloping demand curve. Consequently, $MR \< P$, and while they set $MR = MC$ for profit maximization, their price is greater than marginal cost ($P \> MC$).