A firm under perfect competition counts normal profit as part of its long run average cost (LRAC). The market price is Rs 50. The firm produces 100 units, where price equals LRMC, and its LRAC at this output is Rs 44. Its minimum LRAC is Rs 40. Which of the following is correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → It earns a super-normal profit of Rs 600.
Normal profit is already inside LRAC. So profit over TC is the super-normal profit.
Given:
Price = Rs 50
Output = 100 units
LRAC at 100 units = Rs 44
TR = 50 × 100 = Rs 5,000
TC = 44 × 100 = Rs 4,400
Super-normal profit = 5,000 − 4,400 = Rs 600
Option (2) It earns a super-normal profit of Rs 5,000. — Rs 5,000 is only the TR.
Option (3) It earns a super-normal profit of Rs 1,000. — this uses the minimum LRAC (Rs 40), which is the cost at a different output: (50 − 40) × 100 = Rs 1,000.
Option (4) It earns only normal profit, since it produces where price equals LRMC. — price = LRMC is the profit-maximising rule. The firm earns only normal profit when price equals minimum LRAC.
NCERT (2026-27): “4.4.4 The Normal Profit and Break-even Point The minimum level of profit that is needed to keep a firm in the existing business is defined as normal profit. A firm that does not make normal profits is not going to continue in business. Normal profits are therefore a part of the firm’s total costs. It may be useful to think of them as an opportunity cost for entrepreneurship. Profit that a firm earns over and above the normal profit is called the super-normal profit. …” “4.3 Profit Maximisation A firm produces and sells a certain amount of a good. The firm’s profit, denoted by π, is defined to be the difference between its total revenue (TR) and its total cost of production (TC ).” |