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Home Questions 7SV3DGZ6ZX
Target Exam

CUET

Subject

Economics

Chapter

Micro Economics: Theory of Firms under Perfect Competition

Question:

Read the following statements about perfectly competitive market carefully.
Statement 1: Price must be greater than or equal to Average Cost (AC) in the short run.
Statement 2: Price must be greater than or equal to Average Variable Cost (AVC) in the long run.

Options:

Both the statements are true.

Both the statements are false.

Statement 1 is true and Statement 2 is false .

Statement 2 is true and Statement 1 is false.

Correct Answer:

Both the statements are false.

Explanation:

The correct answer is Option 2: Both the statements are false.

Let's analyze each statement:

  • Statement 1: Price must be greater than or equal to Average Cost (AC) in the short run. This is false. In the short run, a firm can continue to operate as long as the price is greater than or equal to the Average Variable Cost (AVC). If the price is between AVC and AC, the firm is covering its variable costs and some of its fixed costs, minimizing its losses.
  • Statement 2: Price must be greater than or equal to Average Variable Cost (AVC) in the long run. This is false. In the long run, all costs are variable. Therefore, the price must be greater than or equal to the Average Cost (AC) to avoid losses. If price is less than average cost, the firm will exit the industry.

Considering that the statements are reversed:

  • Statement 1 should say: Price must be greater than or equal to Average Variable Cost (AVC) in the short run.
  • Statement 2 should say: Price must be greater than or equal to Average Cost (AC) in the long run.

Therefore, both original statements are false.

The correct answer is: ☀ Both the statements are false.

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