Assertion: Profits are maximum for a firm operating under Perfect Competition at the level of output ($q_0$ ) for which MR = MC.

Reasoning: A firm’s profit maximizing output is the level of output at which P=AVC

Assertion (A) is true but Reasoning (R) is not correct.

The correct answer is Option 3: Assertion (A) is true but Reasoning (R) is not correct.

Assertion: Profits are maximum for a firm operating under Perfect Competition at the level of output ($q_0$ ) for which MR = MC. This is correct. In economics, the fundamental condition for any firm to maximize its profits (or minimize losses) is to produce at the output level where Marginal Revenue (MR) equals Marginal Cost (MC). This applies to firms operating under perfect competition as well. For a perfectly competitive firm, the price (P) it receives for its product is constant regardless of how much it sells, meaning Price (P) = Average Revenue (AR) = Marginal Revenue (MR). Thus, the profit-maximizing condition effectively becomes P = MC.

Reasoning: A firm’s profit maximizing output is the level of output at which P=AVC. This is false. The firm’s profit maximizing output is the level of output at which P=MC. The condition P = AVC (Price equals Average Variable Cost) represents the shutdown point for a firm in the short run. If the market price falls to this level, the firm is just covering its variable costs, and its losses are equal to its fixed costs. If the price falls below AVC, the firm will choose to shut down immediately to minimize losses. However, P = AVC is not the condition for profit maximization. Profit maximization occurs where MR = MC (or P = MC in perfect competition) and the MC curve is rising.