Statement I: In the short run, a firm under perfect competition compares the market price with its average variable cost to decide whether to produce.
Statement II: A firm that produces zero output in the short run still has to bear its total fixed cost.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both Statement I and Statement II are true.
Statement I: In the short run, a firm under perfect competition compares the market price with its average variable cost to decide whether to produce. — True. In the short run the firm produces only if price is greater than AVC. Fixed cost has to be paid anyway, so it does not decide the choice.
Statement II: A firm that produces zero output in the short run still has to bear its total fixed cost. — True. At zero output, TR and TVC are zero, so the firm’s profit is − TFC: it still bears the fixed cost.
NCERT (2026-27): “4.3 Profit Maximisation … For profits to be maximum, three conditions must hold at q0: “Case 1: Price must be greater than or equal to AVC in the short run … Since output is zero, TR and TVC are zero as well. Hence, the firm’s profit at zero output is equal to – TFC. …” |