<p>In a perfectly competitive industry, we have <span class="math-container">$p=MC$</span> in equilibrium. </p>

<p>If firm A prices at marginal cost, each sold unit contributes zero to profits. Because it also has to pay fixed cost 1, it makes a negative profit in a competitive market regardless of how demand looks like. That is, firm A cannot operate in a perfectly competitve industry.</p>

<p>For firm B, you can calculate marginal cost as <span class="math-container">$\frac{\partial c(y)}{\partial y} =1-4y+3y^2$</span>. Consider the increasing part of this function as the supply curve. Indeed you can find demand functions that intersect this function at a price leading to nonnegative profits. That is, firm B can operate in a perfectly competitve industry.</p>

CC BY-SA 4.0
2019-04-30T12:08:00.443Z
2019-04-30T12:08:00.443Z
Bayesian
<p>This was a question in a test. I am looking for an explanation for the answer.</p>

<p>Firm A's cost of producing output y > 0 is c(y) = 1 + y</p>

<p>Firm B's cost of producing output y is c(y) = y(1-y)^2</p>

<p>Answer: Firm B can operate in a perfectly competitive industry but A cannot.</p>

CC BY-SA 4.0
2019-04-30T10:05:24.053Z
In a perfectly competitive industry, p=MC. If firm A prices at marginal cost, each sold unit contributes zero to profits. Because it also has to pay fixed cost 1, it makes a negative profit in a competitive market.
Bayesian
CC BY-SA 4.0
2019-04-30T10:20:53.260Z
@Bayesian i also thought along the same lines. Do you think there is any chance that there might be something more that we're missing out? Maybe I'm just stressed idk.
Abhi Minhas
CC BY-SA 4.0
2019-04-30T11:53:24.120Z
No, I am confident that that's it.
Bayesian
CC BY-SA 4.0
2019-04-30T13:07:30.947Z
(-1) There is no question...
Giskard
<microeconomics>
Which of the following firms can operate in a perfectly competitive industry?
Abhi Minhas
# Which of the following firms can operate in a perfectly competitive industry?

(Asked by: username_0 on 2019-04-30)

This was a question in a test. I am looking for an explanation for the answer.

Firm A's cost of producing output y > 0 is c(y) = 1 + y

Firm B's cost of producing output y is c(y) = y(1-y)^2

Answer: Firm B can operate in a perfectly competitive industry but A cannot.

**Tags:** microeconomics
> **Comments:**
> **username_1**: In a perfectly competitive industry, p=MC. If firm A prices at marginal cost, each sold unit contributes zero to profits. Because it also has to pay fixed cost 1, it makes a negative profit in a competitive market.  
> **username_0**: @Bayesian i also thought along the same lines. Do you think there is any chance that there might be something more that we're missing out? Maybe I'm just stressed idk.  
> **username_1**: No, I am confident that that's it.  
> **username_2**: (-1) There is no question...  

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## 1 answers

### Answer by username_1 on 2019-04-30. Score: 0 | Accepted answer

In a perfectly competitive industry, we have $p=MC$ in equilibrium.

If firm A prices at marginal cost, each sold unit contributes zero to profits. Because it also has to pay fixed cost 1, it makes a negative profit in a competitive market regardless of how demand looks like. That is, firm A cannot operate in a perfectly competitve industry.

For firm B, you can calculate marginal cost as $\frac{\partial c(y)}{\partial y} =1-4y+3y^2$. Consider the increasing part of this function as the supply curve. Indeed you can find demand functions that intersect this function at a price leading to nonnegative profits. That is, firm B can operate in a perfectly competitve industry.


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