In a perfectly competitive market, the price in the short run is less than the firm’s AVC. If the firm still produces a positive output, its loss will be ____________.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Loss = Total Fixed Cost plus the part of Total Variable Cost not covered by total revenue
When price is below AVC, total revenue does not even cover the variable cost. The firm loses its fixed cost and also the uncovered part of its variable cost.
Option (1) Loss less than Total Fixed Cost (TFC) — Incorrect. A loss smaller than TFC needs TR to be above TVC, that is, price above AVC.
Option (2) No loss — Incorrect. Price below AVC means price is also below average cost, so there is a loss.
Option (3) Loss = Total Fixed Cost — Incorrect. A loss equal to TFC is what the firm gets by producing nothing.
Option (4) Loss = Total Fixed Cost plus the part of Total Variable Cost not covered by total revenue — Correct. This loss is bigger than TFC, so the firm does better by shutting down.
NCERT (2026-27): “4.3.3 Condition 3 … Since output is zero, TR and TVC are zero as well. Hence, the firm’s profit at zero output is equal to – TFC. But, the area of rectangle OpAq1 is strictly less than the area of rectangle OEBq1. Hence, the firm’s profit at q1 is [(area EBAp)-TFC], which is strictly less than what it obtains by not producing at all. So, the firm will choose not to produce at all, and exit from the market.”
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