Is the profit-maximizing price-taking firm able to mark up price above the marginal costs of production at the profit-maximizing level of output? Why or why not?

Question

What will be an ideal response?

Answer 1

Because the demand for a price-taking firm's output is perfectly elastic, the firm is unable to mark up price over the marginal costs of production. Recall that a firm maximizes its profit by producing the level of output at which marginal revenue equals marginal cost. For the price taker, marginal revenue and the market price are equal. Thus, if the firm were to try to mark up the price of its product above the market price (and, as such, above marginal cost), it would simply lose all of its customers to its now lower-priced competitors.