Consider the following statements about a firm under perfect competition in the long run:
(A) If price is below the minimum of LRAC, the firm leaves the market.
(B) A firm keeps producing even if its profit is less than normal profit.
(C) A firm that shuts down production has a profit of zero.
(D) If price is below LRAC at an output, the total cost at that output exceeds the total revenue.
(E) A firm that shuts down production still has to bear its fixed cost.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (C) and (D) only
In the long run, a firm that shuts down has zero profit. So it produces only if price covers LRAC; otherwise it leaves.
(A) If price is below the minimum of LRAC, the firm leaves the market. — Correct. The long run supply is zero output for every price below minimum LRAC.
(B) A firm keeps producing even if its profit is less than normal profit. — Incorrect. In the long run a firm does not produce below normal profit; only in the short run may it go on.
(C) A firm that shuts down production has a profit of zero. — Correct. In the long run there is no cost left to bear once production stops.
(D) If price is below LRAC at an output, the total cost at that output exceeds the total revenue. — Correct. TC = LRAC × q and TR = p × q. If LRAC > p, then TC > TR, a loss.
(E) A firm that shuts down production still has to bear its fixed cost. — Incorrect. That is the short run case, where profit at zero output is −TFC. In the long run a shut-down firm’s profit is zero.
NCERT (2026-27): “4.3.3 Condition 3 … Notice that the firm’s total revenue, TR, at q1 is the area of the rectangle OpAq1 (the product of price and quantity) while the firm’s total cost, TC , is the area of the rectangle OEBq1 (the product of average cost and quantity). Since the area of rectangle OEBq1 is larger than the area of rectangle OpAq1, the firm incurs a loss at the output level q1. But, in the long run set-up, a firm that shuts down production has a profit of zero. Again, the firm chooses to exit in this case.” “4.4.2 Long Run Supply Curve of a Firm … Combining cases 1 and 2, we reach an important conclusion. A firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all prices less than the minimum LRAC. In Figure 4.10, the bold line represents the long run supply curve of the firm.” “4.4.4 The Normal Profit and Break-even Point … In the long run, a firm does not produce if it earns anything less than the normal profit. In the short run, however, it may produce even if the profit is less than this level. …” |