Assertion (A): If, at its present output, a competitive firm’s marginal revenue is greater than its marginal cost, it can raise its profit by producing more.
Reason (R): For a competitive firm, marginal revenue equals the market price.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): If, at its present output, a competitive firm’s marginal revenue is greater than its marginal cost, it can raise its profit by producing more. — True. One more unit adds MR to revenue and MC to cost. When MR is larger, profit rises.
Reason (R): For a competitive firm, marginal revenue equals the market price. — True. Each extra unit is sold at the market price, so MR = p.
Why R does not explain A?
R tells us what MR is equal to. A is about comparing MR with MC, and it would hold whatever MR is equal to.
The real reason for A is that profit keeps rising as long as the change in total revenue is greater than the change in total cost, that is, as long as MR > MC.
NCERT (2026-27): “4.3.1 Condition 1 Profits are the difference between total revenue and total cost. Both total revenue and total cost increase as output increases. Notice that as long as the change in total revenue is greater than the change in total cost, profits will continue to increase. Recall that change in total revenue per unit increase in output is the marginal revenue; and the change in total cost per unit increase in output is the marginal cost. Therefore, we can conclude that as long as marginal revenue is greater than marginal cost, profits are increasing. By the same logic, as long as marginal revenue is less than marginal cost, profits will fall. It follows that for profits to be maximum, marginal revenue should equal marginal cost. In other words, profits are maximum at the level of output (which we have called q0) for which MR = MC For the perfectly competitive firm, we have established that the MR = P. So the firm’s profit maximizing output becomes the level of output at which P=MC.” |