12 NCERT CBSE Micro Economics Theory of the Firm under Perfect Competition
Answer Key / Self-Check Copy · Answer & Feedback per Question · Slideshow · Generated 8/14/2026
You will see the answer right after each question.
Theme Analysis
Main ThemeTheory of the Firm under Perfect Competition
Subject CategoryMicroeconomics
Key Concepts
Perfect Competition FeaturesProfit MaximizationRevenue Concepts (TR, AR, MR)Firm's Supply Curve (Short Run & Long Run)Market Supply CurvePrice Elasticity of Supply
Question FocusQuestions focus on core definitions, relationships, conditions for profit maximization, and factors influencing supply curves in a perfectly competitive market. A mix of recall, understanding, and application questions are included, adhering strictly to the provided text.
Q1
MCQ
Remember
Perfect Competition Features
Which of the following is NOT a defining feature of a perfectly competitive market?
A
A large number of buyers and sellers.
B
Firms produce and sell a homogenous product.
C
Significant barriers to entry and exit for firms.
D
Perfect information for all buyers and sellers.
Hint: Think about the conditions that allow many firms to operate and compete freely.
Answer
In a perfectly competitive market, entry into and exit from the market are free for firms, meaning there are no significant barriers. Options A, B, and D are all defining features.
Explanation
Q2
MCQ
Understand
Price-taking Behavior
Price-taking behavior in a perfectly competitive market primarily results from which combination of features?
A
Homogenous products and restricted entry.
B
Large number of buyers/sellers and perfect information.
C
Imperfect information and differentiated products.
D
Small number of firms and free exit.
Hint: Consider what makes individual market participants powerless over price.
Answer
The existence of a large number of buyers and sellers, combined with homogenous products and perfect information, ensures that no single participant can influence the market price, leading to price-taking behavior.
Explanation
Q3
MCQ
Remember
Firm's Objective
What is the primary objective of a firm operating in a perfectly competitive market, according to the text?
A
To maximize its market share.
B
To minimize its total cost of production.
C
To maximize its profit.
D
To achieve a specific level of output.
Hint: Recall the fundamental assumption about firm behavior discussed at the beginning of the chapter.
Answer
The text explicitly states that a firm, under perfect competition, is assumed to be a 'ruthless profit maximiser'.
Explanation
Q4
MCQ
Remember
Total Revenue
How is the total revenue (TR) of a firm defined?
A
Market price of the good minus the firm's output.
B
Market price of the good divided by the firm's output.
C
Market price of the good multiplied by the firm's output.
D
The firm's output multiplied by the average cost.
Hint: Think about how a firm earns money from selling its products.
Answer
Total revenue (TR) is defined as the market price of the good (p) multiplied by the firm's output (q), so TR = p × q.
Explanation
Q5
MCQ
Understand
Average Revenue
For a price-taking firm, what is the relationship between average revenue (AR) and market price (p)?
A
AR is always greater than p.
B
AR is always less than p.
C
AR is equal to p.
D
AR has no direct relationship with p.
Hint: Recall the definition of average revenue and its derivation from total revenue.
Answer
Average revenue (AR) is total revenue per unit of output (TR/q). Since TR = p × q, then AR = (p × q) / q = p. Therefore, for a price-taking firm, average revenue equals the market price.
Explanation
Q6
MCQ
Understand
Marginal Revenue
Why does marginal revenue (MR) equal the market price (p) for a perfectly competitive firm?
A
Because firms can charge any price they want.
B
Because each additional unit sold increases total revenue by the market price.
C
Because total revenue is always constant.
D
Because average revenue decreases as output increases.
Hint: Consider the effect of selling one more unit on total revenue when the price is fixed.
Answer
In perfect competition, a firm is a price-taker. When it increases its output by one unit, this extra unit is sold at the prevailing market price. Hence, the increase in total revenue (MR) is precisely the market price.
Explanation
Q7
MCQ
Apply
Revenue Curves
If the market price of a good is constant at Rs 10, what would be the shape of the firm's Total Revenue (TR) curve?
A
A downward-sloping straight line.
B
A horizontal straight line.
C
An upward-sloping straight line passing through the origin.
D
A U-shaped curve.
Hint: Recall the formula for total revenue and how it changes with output when price is fixed.
Answer
Since TR = p × q and p is constant, the relationship is linear. When q=0, TR=0, so it passes through the origin. As q increases, TR increases proportionally, making it an upward-sloping straight line.
Explanation
Q8
MCQ
Remember
Profit Maximization Conditions
Which condition must hold for a profit-maximizing firm in a perfectly competitive market to produce a positive level of output in the short run?
A
Price (p) must be less than Average Variable Cost (AVC).
B
Marginal Cost (MC) must be decreasing.
C
Price (p) must be greater than or equal to Average Variable Cost (AVC).
D
Total Revenue (TR) must equal Total Cost (TC).
Hint: Consider the costs a firm needs to cover to continue production in the short run.
Answer
One of the three conditions for short-run profit maximization with positive output is that price (p) must be greater than or equal to Average Variable Cost (AVC). If p < AVC, the firm will shut down.
Explanation
Q9
MCQ
Understand
Profit Maximization Conditions
Why must Marginal Cost (MC) be non-decreasing at the profit-maximizing output level (q0)?
A
If MC is decreasing, the firm can increase profit by producing less.
B
If MC is decreasing, producing slightly more would lead to higher profits.
C
If MC is decreasing, it means the firm is not covering its fixed costs.
D
A decreasing MC curve indicates a lack of perfect competition.
Hint: Think about what happens to profit if MC is still falling when it equals price.
Answer
If MC is decreasing at the point where P=MC, it implies that for output levels slightly greater than q0, MC would be less than P. In such a scenario, the firm could increase its profit by producing slightly more, meaning q0 was not the profit-maximizing level.
Explanation
Q10
MCQ
Remember
Profit Maximization Conditions
For profit maximization in the long run, which condition replaces the short-run condition regarding Average Variable Cost (AVC)?
A
Price (p) must be greater than Average Fixed Cost (AFC).
B
Price (p) must be greater than or equal to Long Run Average Cost (LRAC).
C
Price (p) must be equal to Total Cost (TC).
D
Marginal Revenue (MR) must be less than Long Run Marginal Cost (LRMC).
Hint: Consider what costs a firm must cover in the long run to stay in business.
Answer
In the long run, for a firm to continue to produce, price must be greater than or equal to the Long Run Average Cost (LRAC). This is because all costs are variable in the long run.
Explanation
Q11
MCQ
Apply
Profit Calculation
A firm sells 5 units of a good at a market price of Rs 10 per unit. If its total cost of production for 5 units is Rs 40, what is the firm's profit?
A
Rs 10
B
Rs 50
C
Rs 40
D
Rs -10 (a loss of Rs 10)
Hint: Remember the formula for profit, which involves total revenue and total cost.
Answer
Total Revenue (TR) = Price × Quantity = Rs 10 × 5 units = Rs 50. Profit (Ï€) = TR - TC = Rs 50 - Rs 40 = Rs 10.
Explanation
Q12
MCQ
Understand
Demand Curve for a Firm
The demand curve facing a firm in a perfectly competitive market is described as:
A
Perfectly inelastic, a vertical straight line.
B
Perfectly elastic, a horizontal straight line at the market price.
C
Downward-sloping, reflecting the law of demand.
D
Upward-sloping, indicating increasing demand with price.
Hint: Consider the firm's ability to influence the market price.
Answer
For a price-taking firm in perfect competition, it can sell as many units as it wants at the market price, but none above it. This makes the demand curve perfectly elastic, represented by a horizontal straight line at the market price.
Explanation
Q13
MCQ
Remember
Short Run Supply Curve
The short run supply curve of a firm in perfect competition is the rising part of which curve?
A
Average Total Cost (ATC) curve.
B
Average Variable Cost (AVC) curve.
C
Short Run Marginal Cost (SMC) curve from and above the minimum AVC.
D
Short Run Marginal Cost (SMC) curve from and above the minimum ATC.
Hint: Recall the conditions under which a firm will produce a positive output in the short run.
Answer
A firm's short run supply curve is the rising part of the SMC curve from and above the minimum AVC, together with zero output for all prices strictly less than the minimum AVC.
Explanation
Q14
MCQ
Remember
Long Run Supply Curve
Which curve segment represents the long run supply curve of a firm in perfect competition?
A
The rising part of the LRMC curve from and above minimum LRAC.
B
The entire LRMC curve.
C
The LRAC curve above the LRMC curve.
D
The portion of the LRMC curve below the LRAC curve.
Hint: Consider the long-run conditions for a firm to produce a positive output.
Answer
The long run supply curve of a firm is the rising part of the LRMC curve from and above minimum LRAC, together with zero output for all prices less than the minimum LRAC.
Explanation
Q15
MCQ
Understand
Shut Down Point
What defines the short run shut down point for a perfectly competitive firm?
A
The point where price equals Average Total Cost (ATC).
B
The point where price equals Marginal Cost (MC).
C
The point of minimum Average Variable Cost (AVC) where the SMC curve cuts the AVC curve.
D
The point where total revenue equals zero.
Hint: Think about the minimum cost that must be covered for a firm to produce in the short run.
Answer
The short run shut down point is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this price, the firm will produce zero output.
Explanation
Q16
MCQ
Remember
Normal Profit
What is 'normal profit'?
A
Profit earned over and above the total cost.
B
The minimum level of profit needed to keep a firm in the existing business.
C
Profit earned by firms in a monopoly market.
D
Profit that is entirely excluded from total costs.
Hint: Consider the profit level required for a firm to simply remain operational.
Answer
Normal profit is defined as the minimum level of profit that is needed to keep a firm in the existing business. It is considered a part of the firm's total costs, often as an opportunity cost.
Explanation
Q17
MCQ
Understand
Break-even Point
The break-even point of a firm is where it earns:
A
Super-normal profit.
B
Zero economic profit.
C
Only normal profit.
D
Negative profit (a loss).
Hint: Think about the level of profit that covers all costs, including the opportunity cost of entrepreneurship.
Answer
The break-even point is the point on the supply curve at which a firm earns only normal profit. This occurs where the supply curve cuts the Average Cost (AC) or Long Run Average Cost (LRAC) curve.
Explanation
Q18
MCQ
Apply
Determinants of Supply - Technological Progress
If a firm experiences an organizational innovation that allows it to produce the same output with fewer inputs, how will its supply curve be affected?
A
It will shift to the left (upward).
B
It will shift to the right (downward).
C
It will become steeper.
D
It will remain unchanged.
Hint: Consider how reduced production costs affect a firm's willingness to supply at any given price.
Answer
Technological progress or organizational innovation lowers the firm's marginal cost at any output level, causing the MC curve to shift rightward (or downward). Since the supply curve is a segment of the MC curve, the supply curve shifts to the right.
Explanation
Q19
MCQ
Apply
Determinants of Supply - Input Prices
What happens to a firm's supply curve if the wage rate of labor (an input price) increases?
A
The supply curve shifts to the right.
B
The supply curve shifts to the left.
C
The supply curve becomes flatter.
D
The supply curve remains unchanged, but the quantity supplied decreases.
Hint: Think about how higher production costs affect a firm's ability or willingness to supply at a given price.
Answer
An increase in input prices raises the cost of production, leading to an increase in the firm's marginal cost at any output level. This causes the MC curve (and thus the supply curve) to shift to the left (or upward).
Explanation
Q20
MCQ
Apply
Determinants of Supply - Unit Tax
How does the imposition of a unit tax affect a firm's long run supply curve?
A
It shifts the supply curve to the right.
B
It shifts the supply curve to the left.
C
It makes the supply curve steeper.
D
It has no effect on the supply curve, only on profit.
Hint: Consider how an additional cost per unit produced impacts the firm's cost curves.
Answer
A unit tax increases the firm's long run average cost and marginal cost by the amount of the tax (t) for each unit. This causes the LRMC and LRAC curves to shift upward, resulting in the firm's long run supply curve shifting to the left.
Explanation
Q21
MCQ
Understand
Market Supply Curve
How is the market supply curve derived from the supply curves of individual firms?
A
By vertical summation of individual supply curves.
B
By horizontal summation of individual supply curves.
C
By multiplying the quantities supplied by each firm at different prices.
D
By averaging the quantities supplied by each firm at different prices.
Hint: Think about how individual firms' contributions combine to form the total market supply.
Answer
The market supply curve is obtained by taking a horizontal summation of the supply curves of individual firms. At any given price, the market supply is the sum of quantities supplied by all individual firms.
Explanation
Q22
MCQ
Apply
Market Supply Curve
If the number of firms in a perfectly competitive market increases, what effect will this have on the market supply curve?
A
It will shift to the left.
B
It will shift to the right.
C
It will become flatter.
D
It will become steeper.
Hint: Consider how more producers affect the total quantity available in the market.
Answer
If the number of firms in the market increases, the market supply curve shifts to the right, as more firms contribute to the total quantity supplied at each price.
Explanation
Q23
MCQ
Remember
Price Elasticity of Supply
What does the price elasticity of supply (eS) measure?
A
The responsiveness of quantity demanded to changes in price.
B
The total revenue earned by firms at different prices.
C
The responsiveness of quantity supplied to changes in the price of the good.
D
The change in marginal cost due to a change in output.
Hint: Recall the definition of elasticity in the context of supply.
Answer
The price elasticity of supply of a good measures the responsiveness of quantity supplied to changes in the price of the good.
Explanation
Q24
MCQ
Remember
Price Elasticity of Supply Formula
Which of the following is the correct formula for calculating price elasticity of supply (eS)?
A
eS = (Percentage change in price) / (Percentage change in quantity supplied)
B
eS = (Change in quantity supplied) / (Change in price)
C
eS = (Percentage change in quantity supplied) / (Percentage change in price)
D
eS = (Total Revenue) / (Quantity Supplied)
Hint: Remember the ratio of percentage changes used to measure elasticity.
Answer
The price elasticity of supply, eS, is defined as the Percentage change in quantity supplied divided by the Percentage change in price.
Explanation
Q25
MCQ
Apply
Price Elasticity of Supply Calculation
If the price of a good increases by 20% and the quantity supplied increases by 40%, what is the price elasticity of supply?
A
0.5
B
1.0
C
2.0
D
4.0
Hint: Use the formula for price elasticity of supply.
Answer
Price elasticity of supply (eS) = (Percentage change in quantity supplied) / (Percentage change in price) = 40% / 20% = 2.0.
Explanation
Q26
MCQ
Understand
Geometric Elasticity
According to the geometric method for price elasticity of supply, if a straight-line supply curve passes through the origin, what is the elasticity at any point on the curve?
A
Greater than 1.
B
Less than 1.
C
Equal to 1.
D
Zero.
Hint: Recall the special case of the geometric method for elasticity when the supply curve starts from the origin.
Answer
When a straight-line supply curve goes through the origin, the geometric method shows that the price elasticity of supply at any point on it is equal to 1 (Mq0/Oq0 becomes Oq0/Oq0).
Explanation
Q27
MCQ
Understand
Geometric Elasticity
If a straight-line supply curve cuts the price-axis at its positive range and, when extended, cuts the quantity-axis at its negative range, the price elasticity of supply at any point on this curve will be:
A
Greater than 1.
B
Less than 1.
C
Equal to 1.
D
Zero.
Hint: Visualize the geometric representation and the ratio Mq0/Oq0.
Answer
According to the text, for such a supply curve, the ratio Mq0/Oq0 (where M is on the negative quantity axis) will be greater than 1, implying elasticity is greater than 1.
Explanation
Q28
MCQ
Analyze
Profit Maximization, MR=MC
If a firm's marginal revenue (MR) is greater than its marginal cost (MC), what should the firm do to increase its profit?
A
Decrease its output.
B
Increase its output.
C
Keep its output constant.
D
Increase its price.
Hint: Consider the impact on total profit when the revenue from an additional unit exceeds its cost.
Answer
As long as marginal revenue is greater than marginal cost, profits will continue to increase by producing more. The firm should increase its output until MR = MC to maximize profit.
Explanation
Q29
MCQ
Analyze
Profit Maximization, MR=MC
If a firm's marginal revenue (MR) is less than its marginal cost (MC), what should the firm do to increase its profit?
A
Decrease its output.
B
Increase its output.
C
Keep its output constant.
D
Decrease its price.
Hint: Think about the impact on total profit when the cost of an additional unit exceeds its revenue.
Answer
If marginal revenue is less than marginal cost, producing an additional unit would reduce profit. Therefore, the firm should decrease its output until MR = MC to maximize profit.
Explanation
Q30
MCQ
Understand
Price Line
In a perfectly competitive market, the 'price line' for a firm is also its:
A
Total Revenue Curve.
B
Marginal Cost Curve.
C
Average Revenue Curve and Demand Curve.
D
Supply Curve.
Hint: Recall the relationship between market price, average revenue, and the demand faced by a price-taking firm.
Answer
The price line is a horizontal straight line at the market price, representing that the firm can sell any quantity at that price. It is also the firm's AR curve (since AR=p) and its demand curve (as it shows the price at which it can sell different quantities).
Explanation
Q31
MCQ
Apply
Profit Maximization in Short Run (Scenario)
A perfectly competitive firm is currently producing at an output level where P = SMC, but SMC is downward sloping. What can be concluded about this output level?
A
It is the profit-maximizing output level.
B
It is not the profit-maximizing output level, as producing more would increase profit.
C
It is not the profit-maximizing output level, as producing slightly less would increase profit.
D
The firm should shut down immediately.
Hint: Remember the second condition for profit maximization related to the slope of the marginal cost curve.
Answer
If P=SMC but SMC is downward sloping, it means that for output levels slightly to the left (less) of this point, P > SMC. In this range, the firm's profit would be higher by reducing output, so it's not the profit-maximizing level.
Explanation
Q32
MCQ
Analyze
Shut Down vs. Production
In the short run, if the market price (p) is less than the firm's Average Variable Cost (AVC) at all positive output levels, what should a profit-maximizing firm do?
A
Continue to produce to cover fixed costs.
B
Produce at the level where p = SMC.
C
Produce zero output and exit the market.
D
Increase its output to spread fixed costs over more units.
Hint: Consider whether continuing production would make losses larger or smaller than fixed costs alone.
Answer
If price is less than AVC, the firm is not even covering its variable costs. By producing, it incurs losses greater than its fixed costs (which it would incur if it produced zero). Therefore, it's better to produce zero output and exit in the short run to minimize losses.
Explanation
Q33
MCQ
Analyze
Shut Down vs. Production
In the long run, if the market price (p) is less than the firm's Long Run Average Cost (LRAC) at all positive output levels, what should a profit-maximizing firm do?
A
Continue to produce as long as it covers variable costs.
B
Produce at the level where p = LRMC.
C
Produce zero output and exit the market.
D
Increase its output to try and lower LRAC.
Hint: Remember that in the long run, all costs must be covered for a firm to stay in business.
Answer
In the long run, all costs are variable. If price is less than LRAC, the firm incurs losses. A firm that shuts down in the long run has zero profit. Therefore, if p < LRAC, the firm will choose to exit the market.
Explanation
Q34
MCQ
Understand
Opportunity Cost
The concept of 'normal profit' can be related to which economic concept?
A
Fixed cost.
B
Sunk cost.
C
Opportunity cost.
D
Marginal cost.
Hint: Consider what an entrepreneur gives up by running their business instead of pursuing the next best alternative.
Answer
The text states that normal profits 'may be useful to think of them as an opportunity cost for entrepreneurship.' It represents the minimum return required to keep the entrepreneur's resources in the current business.
Explanation
Q35
MCQ
Remember
Super-Normal Profit
What is 'super-normal profit'?
A
Profit earned when the firm's output is zero.
B
Profit that is less than normal profit.
C
Profit that a firm earns over and above the normal profit.
D
Profit that covers only fixed costs.
Hint: Think about the profit level that exceeds the minimum required to stay in business.
Answer
Profit that a firm earns over and above the normal profit is called the super-normal profit.
Explanation
Q36
MCQ
Understand
Supply Curve Derivation
A firm's 'supply' refers to the quantity it chooses to sell at a given price, considering what other factors as constant?
A
Market demand and consumer preferences.
B
Technology and prices of factors of production.
C
The number of buyers and sellers.
D
The firm's total revenue and profit.
Hint: Recall the ceteris paribus assumption when defining a supply curve.
Answer
A firm's 'supply' is the quantity that it chooses to sell at a given price, given technology, and given the prices of factors of production. These factors are held constant when defining the supply curve.
Explanation
Q37
MCQ
Apply
Short Run Supply Curve
If the market price falls below the minimum Average Variable Cost (AVC) in the short run, a perfectly competitive firm will:
A
Increase production to cover fixed costs.
B
Produce at the output level where P = SMC.
C
Produce zero output.
D
Lower its price to attract more buyers.
Hint: Consider the firm's decision to continue or cease production when variable costs are not covered.
Answer
As stated in the derivation of the short run supply curve, if the market price is less than the minimum AVC, the firm produces zero output because it cannot even cover its variable costs.
Explanation
Q38
MCQ
Apply
Long Run Supply Curve
If the market price falls below the minimum Long Run Average Cost (LRAC) in the long run, a perfectly competitive firm will:
A
Continue production to maintain market share.
B
Produce at the output level where P = LRMC.
C
Produce zero output.
D
Seek government subsidies to remain in business.
Hint: Remember that in the long run, firms must cover all costs to avoid losses and remain in the market.
Answer
In the long run, if the market price is less than the minimum LRAC, the firm incurs a loss and will produce zero output, choosing to exit the market.
Explanation
Q39
MCQ
Understand
Price Elasticity of Supply
If the supply curve is vertical, what does this imply about the price elasticity of supply?
A
It is perfectly elastic (infinite).
B
It is perfectly inelastic (zero).
C
It is unitary elastic (one).
D
It is greater than one.
Hint: Consider what a vertical supply curve means for quantity supplied when price changes.
Answer
When the supply curve is vertical, quantity supplied does not change regardless of price changes. This means supply is completely insensitive to price, and the elasticity of supply is zero (perfectly inelastic).
Explanation
Q40
MCQ
Understand
Price Elasticity of Supply
What is generally true about the price elasticity of supply when the supply curve is positively sloped?
A
It is always negative.
B
It is always zero.
C
It is always positive.
D
It can be positive or negative depending on the good.
Hint: Recall the typical relationship between price and quantity supplied, and how it affects the sign of elasticity.
Answer
When the supply curve is positively sloped, a rise in price leads to a rise in supply. Since both price and quantity supplied move in the same direction, the percentage change ratio will be positive, so the elasticity of supply is positive.
Explanation
Q41
MCQ
Understand
Perfect Competition Features
The feature of 'homogenous product' in perfect competition implies that:
A
Products are highly differentiated across firms.
B
Buyers prefer one firm's product over another's.
C
The product of one firm cannot be differentiated from that of any other firm.
D
Firms compete primarily on product quality.
Hint: Consider what 'homogenous' means in the context of goods offered by different firms.
Answer
Homogenous products mean that the product of each firm is identical. A buyer can choose to buy from any firm and gets the same product.
Explanation
Q42
MCQ
Apply
Revenue and Output
If a candle manufacturer sells 4 boxes of candles at a market price of Rs 10 per box, what is the total revenue?
A
Rs 4
B
Rs 10
C
Rs 40
D
Rs 0
Hint: Apply the total revenue formula.
Answer
Total Revenue (TR) = Price × Quantity = Rs 10 × 4 boxes = Rs 40.
Explanation
Q43
MCQ
Understand
Profit Maximization, MR=MC
The statement 'profits are maximum at the level of output for which MR = MC' is a fundamental condition for:
A
Minimizing total cost.
B
Achieving maximum revenue.
C
A firm's profit maximization.
D
Ensuring perfect competition.
Hint: Recall the direct relationship between marginal revenue, marginal cost, and the goal of the firm.
Answer
The text explains that as long as MR > MC, profits increase, and when MR < MC, profits fall. Therefore, for profits to be maximum, MR must equal MC.
Explanation
Q44
MCQ
Apply
Profit Maximization in Short Run
A perfectly competitive firm is producing an output where P = SMC and SMC is rising. However, P < AVC. What should the firm do in the short run?
A
Continue producing at that output level.
B
Increase output to lower AVC.
C
Decrease output until P = AVC.
D
Shut down production.
Hint: Remember the third profit maximization condition for the short run.
Answer
Even if P=SMC and SMC is rising, if P < AVC, the firm is not covering its variable costs. In such a situation, the firm minimizes its losses by producing zero output and shutting down in the short run.
Explanation
Q45
MCQ
Understand
Determinants of Supply
Any factor that affects a firm's marginal cost curve is also considered a determinant of its supply curve because:
A
Supply curves are always vertical.
B
The supply curve is essentially a segment of the marginal cost curve.
C
Marginal cost is only relevant for demand curves.
D
Firms only consider average costs when making supply decisions.
Hint: Recall the relationship between the marginal cost curve and the firm's supply curve.
Answer
The text explicitly states that a firm's supply curve is a part of its marginal cost curve. Therefore, any factor influencing MC will also influence the supply curve.
Explanation
Q46
MCQ
Analyze
Market Supply Curve
Consider a market with two firms. Firm 1 will not produce if the market price is less than Rs 10. Firm 2 will not produce if the market price is less than Rs 15. At a market price of Rs 12, what will be the market supply behavior?
A
Neither firm will produce, so market supply is zero.
B
Only firm 1 will produce a positive amount, so market supply equals firm 1's supply.
C
Only firm 2 will produce a positive amount, so market supply equals firm 2's supply.
D
Both firms will produce, and market supply is the sum of their individual supplies.
Hint: Evaluate each firm's production decision at the given market price based on their minimum production prices.
Answer
At a market price of Rs 12, which is greater than Rs 10 but less than Rs 15, only firm 1 will find it profitable to produce. Firm 2 will produce zero output. Thus, market supply will coincide with firm 1's supply.
Explanation
Q47
MCQ
Evaluate
Perfect Competition Assumptions
The assumption of 'perfect information' in a perfectly competitive market implies that:
A
Only sellers have complete information about prices and quality.
B
Buyers and sellers are fully aware of all relevant market details.
C
Information is costly to obtain for both buyers and sellers.
D
Firms can easily hide product defects from buyers.
Hint: Consider the extent of knowledge about the market held by participants in perfect competition.
Answer
Perfect information implies that all buyers and all sellers are completely informed about the price, quality, and other relevant details about the product, as well as the market.
Explanation
Q48
MCQ
Understand
Revenue Curves
For a price-taking firm, the relationship MR = AR = p holds true because:
A
The firm can influence market price.
B
Each additional unit is sold at the constant market price.
C
Total revenue remains constant regardless of output.
D
Average cost always equals average revenue.
Hint: Focus on the implications of a constant market price for a firm's revenue per unit and for an additional unit.
Answer
Since the firm is a price-taker, the market price (p) is constant. Therefore, average revenue (TR/q) is always p, and marginal revenue (change in TR from one more unit) is also p because each additional unit sells for p.
Explanation
Q49
MCQ
Apply
Price Elasticity of Supply Calculation
A firm supplies 4 units of output at a market price of Rs 10. When the market price increases to Rs 30, the firm's supply elasticity is 1.25. What quantity will the firm supply at the new price?
A
4 units
B
8 units
C
10 units
D
14 units
Hint: Use the price elasticity of supply formula: eS = (%ΔQ / %ΔP). Calculate the percentage change in price first, then use elasticity to find the percentage change in quantity, and finally the new quantity.
Answer
Given: P1=10, Q1=4, P2=30, eS=1.25. % change in P = ((30-10)/10) * 100 = 200%. eS = (% change in Q) / (% change in P) => 1.25 = (% change in Q) / 200% => % change in Q = 1.25 * 200% = 250%. New Q = Q1 * (1 + % change in Q / 100) = 4 * (1 + 250/100) = 4 * (1 + 2.5) = 4 * 3.5 = 14 units.
Explanation
Q50
MCQ
Understand
Profit Maximization Graphical Representation
In the short run, if a perfectly competitive firm produces at the profit-maximizing output level (q0), its profit is graphically represented by the area between which curves?
A
The total revenue curve and the total cost curve.
B
The market price line and the marginal cost curve.
C
The market price line (AR) and the Short Run Average Cost (SAC) curve, multiplied by quantity.
D
The Average Variable Cost (AVC) curve and the Short Run Marginal Cost (SMC) curve.
Hint: Recall that profit is the difference between total revenue and total cost. Think about how these are represented graphically using average curves.
Answer
Profit is (Price - SAC) * Quantity. Graphically, total revenue is the area of the rectangle formed by the price line and quantity, and total cost is the area of the rectangle formed by SAC and quantity. The difference between these two rectangular areas represents profit.
Explanation
Question 1 of 50
No comments:
Post a Comment