Mankiw's Principles of Microeconomics Chapter 14

1. Why does a perfectly competitive firm maximize revenues where P=MC? 

Profit maximization is the goal of any competitive firm. In order to accomplish this, several factors such as average total cost, average variable cost, and marginal costs must be analyzed. If a firm realizes that marginal revenue exceeds marginal costs then increased levels of production will contribute to maximizing the firm’s profit.

2. Why is P=MR in this market type?

Price (P) would be equal to Market Revenue (MR) because the firm is considered a price taker. In other words a competitive market has many firms and with several options available to the consumer, none of these firms can influence the price at which the good or service is sold at.

3. Name a business you think belongs in this category.  Why?

Auto manufacturing is a good example of an industry that seeks to maximize profit by monitoring the costs of production. Each company considers how those costs impact their supply decisions. Both short term economic conditions and long term economic conditions dictate their levels of production. The auto industry is known for rapidly adjusting production levels in order to maximize the firm’s profit margins.