Correct Option: B. Marginal cost equals marginal revenue. Detailed Explanation: In a perfectly competitive market, firms are price takers, meaning they cannot influence the market price of their product. Instead, they accept the market price as given. The relationship between marginal cost (MC) and marginal revenue (MR) is crucial for determining the optimal level of output for a firm.

1. Understanding Marginal Cost (MC):
2. Marginal Cost is the additional cost incurred by producing one more unit of a good or service. It is calculated as the change in total cost divided by the change in quantity produced.
3. Formula: [ MC = \frac{\Delta TC}{\Delta Q} ]
4. In a perfectly competitive market, as production increases, the MC may initially decrease due to economies of scale but will eventually rise due to diminishing returns.
5. Understanding Marginal Revenue (MR):
6. Marginal Revenue is the additional revenue gained from selling one more unit of a good or service. In a perfectly competitive market, MR is equal to the market price (P) because each additional unit sold adds exactly the price of that unit to total revenue.
7. Formula: [ MR = \frac{\Delta TR}{\Delta Q} = P ]
8. Since firms are price takers, they can sell as much as they want at the market price without affecting that price.
9. Equilibrium Condition:
10. A firm maximizes its profit when it produces the quantity of output where Marginal Cost equals Marginal Revenue (MC = MR). At this point, the cost of producing an additional unit is exactly equal to the revenue gained from selling that unit. If MC is less than MR, the firm can increase profit by producing more. Conversely, if MC is greater than MR, the firm should reduce output to maximize profit.
11. Graphical Representation:
12. In a typical graph, the MC curve is U-shaped, initially decreasing and then increasing. The MR curve is a horizontal line at the market price level. The intersection of the MC curve and the MR line indicates the equilibrium quantity of output.
13. Why Other Options Are Incorrect:
14. Option A: Marginal cost is always greater than marginal revenue.
    • This statement is incorrect because if MC is always greater than MR, the firm would not be maximizing profit. Instead, it would be losing potential profit by not producing more units.
15. Option C: Marginal revenue exceeds marginal cost.
    • This is also incorrect at equilibrium. If MR exceeds MC, the firm can increase its profit by producing more. Therefore, this condition cannot hold true at the equilibrium point where profit is maximized.
16. Option D: Marginal cost is less than average total cost.
    • While this statement can be true in certain contexts, it does not directly relate to the equilibrium condition of MC and MR. At equilibrium, the focus is on the relationship between MC and MR, not on average total cost.

Summary:

• In a perfectly competitive market, firms maximize profit by producing where Marginal Cost equals Marginal Revenue (MC = MR).
• Marginal Cost is the cost of producing one more unit, while Marginal Revenue is the revenue from selling one more unit.
• At equilibrium, if MC is less than MR, firms should increase production; if MC is greater than MR, they should decrease production.
• Understanding this relationship is crucial for making informed production decisions in a competitive market.