In a perfectly competitive market, if a firm can increase its profits by expanding its output, what must be true about the relationship between price and marginal cost at the current output level?

Introduction / Context:
Profit maximisation is a central idea in microeconomics. Under perfect competition, a firm is a price taker, which means it accepts the market price and chooses only the output level. The standard condition for profit maximisation in this setting is that the firm produces the quantity at which price equals marginal cost, provided that price is at least as large as average variable cost. This question checks understanding of what happens when the firm is not yet at that point and can still increase profit by raising output.

Given Data / Assumptions:
• The market structure is perfect competition, so the firm is a price taker. • The firm can increase profit by increasing its output from the current level. • All other conditions such as technology and factor prices are unchanged. • We must infer the relation between price and marginal cost at the current output.

Concept / Approach:
In perfect competition, the demand curve faced by an individual firm is perfectly elastic at the market price. The firm maximises profit by producing output where marginal cost equals price, as long as price covers average variable cost. If at the current output price is greater than marginal cost, then producing and selling one more unit adds more to revenue than it adds to cost, so profit rises when output increases. If price is less than marginal cost, producing more units would reduce profit. Therefore, the sign of price minus marginal cost tells us whether the firm should expand or contract output.

Step-by-Step Solution:
Step 1: Recall the profit maximisation rule in perfect competition: produce where price equals marginal cost. Step 2: At any output level where price is greater than marginal cost, the extra revenue from one more unit exceeds the extra cost of producing that unit. Step 3: In that situation, adding one more unit increases total profit, so the firm has an incentive to increase output. Step 4: The question states that the firm can increase profit by expanding output, which implies that it is not yet at the point where price equals marginal cost. Step 5: Therefore, at the current level of output, price must exceed marginal cost and not the other way round.

Verification / Alternative check:
Imagine a simple numerical example. Suppose the market price is Rs 10 per unit. If the marginal cost of the last unit produced is Rs 7, then producing one more unit yields Rs 10 in revenue while adding only Rs 7 in cost. Profit rises by Rs 3. This clearly means the firm should produce more until marginal cost rises and becomes equal to price. If, instead, marginal cost were Rs 12 while price is Rs 10, extra production would reduce profit. This alternative check supports the condition that, when profit can be increased by raising output, price must be greater than marginal cost at the current production level.

Why Other Options Are Wrong:
Price exceeding average total cost implies that the firm is earning positive economic profit, but it does not by itself tell us whether producing more will raise or lower profit, because profit maximisation depends on marginal cost, not average total cost.
Average variable cost exceeding average total cost is not even possible, because average total cost equals average fixed cost plus average variable cost, so average total cost is always at least as large as average variable cost.
Fixed costs being zero has no direct relation to whether producing extra units will raise or lower profit in the short run, because the decision to expand output is guided by marginal cost and price, not by the level of fixed cost.

Common Pitfalls:
A frequent mistake is to confuse average concepts with marginal concepts. Learners sometimes think that as long as price is above average total cost, it is always optimal to expand output, ignoring marginal cost. Another pitfall is to forget that the firm in perfect competition is a price taker and cannot raise price to improve profit; it can only adjust quantity. Focusing on the simple rule that profit increases when price is greater than marginal cost and decreases when marginal cost is greater than price helps avoid confusion.

Final Answer:
If a perfectly competitive firm can increase its profit by expanding output, then at the current output level price exceeds marginal cost.