Assertion (A): In the long run, a competitive firm that shuts down production has a profit of zero.
Reason (R): In the long run, a firm that shuts down production must still pay its fixed cost.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
In the long run a firm that shuts down has no costs at all, so its profit is zero. Paying a fixed cost at zero output happens only in the short run.
Assertion (A): In the long run, a competitive firm that shuts down production has a profit of zero. — True. In the long run all inputs can be changed, so there is no fixed cost. At zero output the firm has no revenue and no cost, and its profit is zero.
Reason (R): In the long run, a firm that shuts down production must still pay its fixed cost. — False. This is true of the short run, where the profit at zero output is −TFC. In the long run there is no fixed cost to pay.
NCERT (2026-27): “4.3.3 Condition 3 … Now recall that the firm’s profit at q1 is TR – (TVC + TFC); that is, [the area of rectangle OpAq1] – [the area of rectangle OEBq1] – TFC. … Since output is zero, TR and TVC are zero as well. Hence, the firm’s profit at zero output is equal to – TFC.” “Case 2: Price must be greater than or equal to AC in the long run … 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.” |