Solve this: 

Q. If P < MC for a profit maximising firm under perfect competition, what will the firm do in such a situation ?

If the firm is in a perfect competition, it is so small in the market that its quantity produced and sold has no effect on the price, then MR simply equals to price.

We know that,

If MR>MC, then the firm should continue to produce more output.

If MR=MC, then the firm should stop producing the additional unit. As the additional unit’s MC would be higher according to law of diminishing returns, MR would be less than MC; that is, the firm would lose profit by producing additional units. Therefore, this is the profit maximising output level.

If MR<MC, then the firm should lower its output.


Since MR=P, when P<MC the firm should lower its output.