An industry operating in a perfect competitive market situation will maximum profit when

Analyze the question: It asks for the condition under which a firm (or industry) in perfect competition maximizes profit.

Concept: Profit is maximized at the output where Marginal Cost (MC) = Marginal Revenue (MR), provided MC cuts MR from below (MC is rising). This is the universal profit-maximizing rule for every market structure.

In perfect competition, the firm is a price taker, so the price is constant. This means:

• AR = MR = Price (the demand curve is horizontal)
• So the profit-maximizing condition can also be written as MC = MR = AR = P

Step-by-step reasoning:

1. If MC < MR, producing one more unit adds more to revenue than to cost, so profit rises. The firm should expand output.
2. If MC > MR, the last unit costs more than it earns, so profit falls. The firm should cut output.
3. Profit is at its maximum where MC = MR.

Checking the options:

• A. DD = SS: This is the condition for market equilibrium (price determination), not the firm's profit-maximizing condition.
• B. DD < SS: This means a surplus, which has nothing to do with profit maximization.
• C. MC > AC: This means average cost is rising, but it says nothing about maximum profit.
• D. MC < AR: Here, profit can still be increased by producing more, so it is not the maximum point.
• E. MC = MR: This is the correct profit-maximizing condition.

Exam tip: Remember "MC = MR" as the golden rule of profit maximization. Whenever a question asks about maximum profit or equilibrium output of a firm, look for MC = MR first. In perfect competition, because MR = AR = Price, you may also see it written as MC = P.