Statement I: In the long run, the shut down point and the break-even point of a competitive firm are the same point.
Statement II: In the short run, a competitive firm’s shut down point is at a lower price than its break-even point.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both Statement I and Statement II are true.
In the long run both points lie at the minimum LRAC. In the short run the shut down point is at the minimum AVC and the break-even point at the minimum SAC, which is higher.
Statement I: In the long run, the shut down point and the break-even point of a competitive firm are the same point. — True. The long run shut down point is the minimum of LRAC. The break-even point is also the point of minimum LRAC. So the two coincide.
Statement II: In the short run, a competitive firm’s shut down point is at a lower price than its break-even point. — True. The short run shut down point is the minimum AVC; the break-even point is the minimum SAC. SAC = AVC + AFC, so SAC lies above AVC and its minimum is at a higher price. Between these two prices the firm produces even though it earns less than normal profit.
NCERT (2026-27): “4.4.3 The Shut Down Point … Therefore, along the supply curve as we move down, the last price-output combination at which the firm produces positive output is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this, there will be no production. This point is called the short run shut down point of the firm. In the long run, however, the shut down point is the minimum of LRAC curve.” “4.4.4 The Normal Profit and Break-even Point … In the short run, however, it may produce even if the profit is less than this level. The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” |