Q.For which of the following situations does a perfectly competitive firm stop production in the short term?
(A) P > AC
(B) P = AC
(C) P < AVC
(D) AVC < P < AC.
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Cost Concepts: Fixed, Variable, Average and Marginal Cost
Fixed cost (e.g. rent on a factory, insurance on machinery) does not change with the level of output, even at zero output; variable cost (e.g. raw materials, casual labour) rises and falls directly with output. Average Fixed Cost (AFC) = Total Fixed Cost ÷ Output, and since total fixed cost never changes, AFC falls continuously as output rises, giving it a rectangular-hyperbola shape. In the short run, Average Variable Cost (AVC) and Average Cost (AC) are both typically U-shaped (falling, then …
In the short run a firm keeps producing as long as the price it receives at least covers its average variable cost (AVC), since it can then cover all variable costs and part (or all) of its fixed cost. If price falls belo …
A perfectly competitive firm shuts down in the short run exactly when price falls below average variable cost (P < AVC), because producing would then lose more than the unavoidable fixed cost alone.
In the short run, fixed costs must be paid whether the firm produces or not, so the firm's decision to produce is based on whether revenue covers variable cost, not total cost.
- If P > AC, the firm earns supernormal profit — it definitely produces.
- If P = AC, the firm earns only normal profit — it still produces.
- If AVC < P < AC, the firm makes a loss, but producing still lets it recover all variable cost plus a part of fixed cost, so it is better off producing than shutting down (shutting down would mean losing the entire fixed cost). …
Showing the 12 most recent of 14 on this concept.
- CBSE 2025Set ANNUAL1 markMCQQ.Average fixed cost curve will be— (A) downward sloping (B) horizontal (C) U-shaped (D) upward sloping.
›Reveal solutionSolution
AFC = TFC / Q. Because TFC is constant, AFC falls continuously (never U-shaped) as output rises.
Average Fixed Cost (AFC) is obtained by dividing Total Fixed Cost (TFC) — rent, insurance, salaries of permanent staff, interest on loans, etc., which do not change with the level of output — by the quantity produced (Q): AFC = TFC / Q.
Since the numerator (TFC) stays fixed while the denominator (Q) keeps increasing as the firm produces more, AFC must keep falling with every additional unit produced. It falls steeply at first and then more and more slowly, approaching the output axis but never touching it (since TFC is never fully zero as long as output is positive). Graphically, this traces out a smooth, continuously downward-sloping curve shaped like a rectangular hyperbola.
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- CBSE 2025Set ANNUAL1 markMCQQ.When the average cost is minimum, then the marginal cost is— (A) greater than average cost (B) less than average cost (C) equal to average cost (D) zero.
›Reveal solutionSolution
MC = AC exactly at the point where AC is at its minimum; this is a standard marginal-average relationship, not a coincidence.
This follows from the general mathematical relationship between any 'marginal' and its corresponding 'average' magnitude: whenever the marginal value is less than the average, the average must be falling (new addition pulls the average down); whenever the marginal value is greater than the average, the average must be rising (new addition pulls the average up). The average can only be at its turning point (minimum) at the exact output level where marginal equals average — pulling it neither down nor up.
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- CBSE 2025Set ANNUAL1 markMCQQ.For which of the following situations does a perfectly competitive firm stop production in the short term? (A) P > AC (B) P = AC (C) P < AVC (D) AVC < P < AC.
›Reveal solutionSolution
A perfectly competitive firm shuts down in the short run exactly when price falls below average variable cost (P < AVC), because producing would then lose more than the unavoidable fixed cost alone.
In the short run, fixed costs must be paid whether the firm produces or not, so the firm's decision to produce is based on whether revenue covers variable cost, not total cost.
- If P > AC, the firm earns supernormal profit — it definitely produces.
- If P = AC, the firm earns only normal profit — it still produces.
- If AVC < P < AC, the firm makes a loss, but producing still lets it recover all variable cost plus a part of fixed cost, so it is better off producing than shutting down (shutting down would mean losing the entire fixed cost). …
- CBSE 2024Set ANNUAL1 markMCQQ.The marginal cost curve—(a) first falls and then rises(b) never rises(c) intersects the average cost curve at its minimum point(d) never falls.
›Reveal solutionSolution
The MC curve intersects the AC curve at AC's minimum point -- this is a general mathematical property of the marginal-average relationship, not just a feature of one particular cost function.
Let us check each option.
- (a) 'First falls and then rises' describes the typical U-shape of the short-run MC curve (falling while returns increase, rising once diminishing returns set in). This is a common pattern but depends on the particular production/cost function -- it is not a universal law true for every firm.
- (b) 'Never rises' is false -- under the law of variable proportions, MC eventually rises as output increases. …
- CBSE 2024Set ANNUAL1 markMCQQ.In a perfectly competitive market, the second (sufficient) condition for profit to be maximum is—(a) MC = Marginal Revenue(b) Marginal Revenue = Marginal Cost(c) Marginal cost curve slopes downward(d) Marginal cost curve slopes upward.
›Reveal solutionSolution
MR = MC is the necessary condition for profit maximisation; the sufficient condition is that the MC curve must be rising (upward sloping) at that point of intersection.
Profit maximisation requires two conditions:
- First-order (necessary) condition: Marginal Revenue = Marginal Cost. In perfect competition, since Price = MR, this becomes P = MC. Options (a) and (b) both restate this first condition in different words -- they are necessary but not sufficient on their own, because MR = MC can also occur at a point of minimum profit (or maximum loss). …
- CBSE 2024Set ANNUAL1 markQ.Fill in the blank: ___ profit is included in the cost of production. Or Fill in the blank: Under the cost-determines-price theory, the industry's long-run supply curve is ___.
›Reveal solutionSolution
Normal profit is the implicit/opportunity cost of the entrepreneur's own resources and so is included in total cost of production; under the classical cost-of-production ('cost determines price') theory, the industry's long-run supply curve (for a constant-cost industry) is drawn as perfectly elastic (horizontal) because long-run price settles at the minimum average cost of production regardless of the quantity supplied.
Main blank -- '___ profit is included in the cost of production': The answer is Normal profit. Normal profit is the minimum payment required to keep an entrepreneur supplying their enterprise, organisational skill and risk-bearing to this particular line of production rather than the next-best alternative use. Because it is the opportunity cost of the entrepreneur's own resources, economists treat normal profit as an implicit cost and include it within total cost -- so a firm earning exactly normal profit (and no more) is said to be earning zero ECONOMIC profit, even though its accounting profit is positive.
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- CBSE 2023Set ANNUAL1 markMCQQ.In the short run, what is the shape of the average variable cost curve?(a) concave(b) rectangular hyperbola(c) parallel to the x-axis(d) U-shaped.
›Reveal solutionSolution
The short-run AVC curve is U-shaped because of the law of variable proportions.
In the short run, at least one factor (say capital) is fixed while the variable factor (labour) changes. As output rises from zero, the variable factor is used more efficiently (increasing returns), so AVC falls. Beyond a certain point, diminishing returns set in — each extra unit of the variable factor adds less to output than the one before, pushing A …
- CBSE 2023Set ANNUAL1 markMCQQ.The condition necessary — or first-order condition — for any firm's profit to be maximum is—(a) Price = Marginal Revenue(b) Marginal Revenue = Marginal Cost(c) Marginal cost curve is downward sloping(d) Marginal cost curve is upward sloping.
›Reveal solutionSolution
Profit is maximum where MR = MC (first-order condition), provided MC cuts MR from below.
As long as MR exceeds MC, producing one more unit adds more to revenue than to cost, so profit keeps rising; if MC exceeds MR, the extra unit costs more than it earns, so profit falls. Profit is therefore maximised exactly where MR = MC — beyond this point every additional unit reduces profit. (The full, sufficient condition also requires …
- CBSE 2019Set ANNUAL1 markMCQQ.The second order or sufficient condition for maximization of profit of a firm in a perfectly competitive market is—(a) Marginal Revenue = Marginal Cost(b) Marginal cost curve is upward rising(c) Marginal cost curve slopes downwards(d) Price = Marginal Revenue.
›Reveal solutionSolution
MR = MC alone can describe either maximum or minimum profit; it is a maximum only when MC is rising through that point, which is the sufficient (second-order) condition.
In a perfectly competitive market, the first-order (necessary) condition for profit maximisation is that marginal revenue equals marginal cost (MR = MC). However, this condition alone could also describe a point of minimum profit (maximum loss), so a second, sufficient condition is additionally required: the marginal cost curve must be rising (sloping upward), i.e., cutting the marginal revenue curve from below, at the output level where MR = MC. This ensures that for any output slightly beyond this point, MC exceeds MR (making further production unprofitable), and for any output slightly b …
- CBSE 2019Set ANNUAL1 markMCQQ.In the short run, the average fixed cost curve is—(a) upward rising(b) rectangular hyperbola(c) U-shaped(d) concave.
›Reveal solutionSolution
Because AFC x Output always equals the constant total fixed cost, the AFC curve has the shape of a rectangular hyperbola, continuously declining as output rises.
In the short run, total fixed cost (TFC) does not vary with the level of output. Average fixed cost is defined as AFC = TFC/Q. Since TFC is a constant, the product AFC x Q always equals that same constant value at every level of output - which is exactly the mathematical property of a rectangular hyperbola (where the product of the two axis variables is constant). As output rises, AFC ke …
- CBSE 2018Set ANNUAL1 markMCQQ.Marginal Cost (MC) curve(a) never slopes downwards(b) initially slopes down and then slopes up(c) never slopes upwards(d) intersects the AC curve at its highest point.
›Reveal solutionSolution
The short-run Marginal Cost curve is U-shaped - falling, then rising - option (b).
The shape of the short-run marginal cost (MC) curve is a direct consequence of the law of variable proportions. At low levels of output, as more of the variable factor is added to the fixed factor, the firm benefits from increasing returns (greater specialisation, better utilisation of fixed capacity), so the cost of producing each additional unit FALLS - MC slopes downward. Beyond a certain point, diminishing returns set in (the fixed factor becomes a binding constraint), so each additional unit becomes progressively more expensive to produce - MC slopes upward. This gives the MC curve its characteristic U-shape: initially sloping down, reaching a minimum, and then sloping up. This also explains why the MC curve inters …
- CBSE 2018Set ANNUAL1 markQ.Write true or false: The monopolist is a price maker. Or Write true or false: Under monopoly, price is always equal to marginal cost.
›Reveal solutionSolution
A monopolist is indeed a price maker (true), but price never equals marginal cost under monopoly (so that alternative statement is false).
Main statement - monopolist as price maker
Because a monopolist is the SOLE seller of a good with no close substitutes, it faces the entire (downward-sloping) market demand curve itself, rather than a given market price set by outside forces. This gives the monopolist genuine discretion to choose where on the demand curve to operate - i.e. to set the price (and let quantity adjust) or set the quantity (and let price adjust) - unlike a perfectly competitive firm, which must simply accept the price determined in the wider market (a 'price taker'). The statement that the monopolist is a 'price maker' is therefore TRUE.
Or - price equal to marginal cost under monopoly …
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