Two firms both want to maximise their profits through pricing. Firm X aims at the most profit in the short run, while Firm Y aims to maximise its total profit in the long run.
Which of the following shows how each firm is likely to price its products?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Firm X charges the maximum price; Firm Y opts for a lower per unit price.
Option (1) Firm X opts for a lower per unit price; Firm Y charges the maximum price. — Incorrect. The prices are reversed for the two firms. The maximum price goes with short-run profit, and a lower per unit price with long-run profit.
Option (2) Both Firm X and Firm Y charge the maximum price. — Incorrect. Firm Y aims at long-run profit, so it keeps a lower per unit price to win a larger share of the market.
Option (3) Firm X charges the maximum price; Firm Y opts for a lower per unit price. — Correct. A firm that wants the most profit in the short run charges the maximum price. A firm that wants the most total profit in the long run keeps a lower per unit price. It captures a larger share of the market and earns more through bigger sales.
Option (4) Both Firm X and Firm Y opt for a lower per unit price. — Incorrect. Firm X aims at short-run profit, so it would charge the maximum price.
NCERT (2026-27 Edition): “5. Pricing Objectives: Pricing objectives are another important factor affecting the fixation of the price of a product or a service. Generally the objective is stated to be maximise the profits. But there is a difference in maximising profit in the short run and in the long run. If the firm decides to maximise profits in the short run, it would tend to charge maximum price for its products. But if it is to maximise its total profit in the long run, it would opt for a lower per unit price so that it can capture larger share of the market and earn greater profits through increased sales. …” |