A competitive firm’s total cost includes normal profit. At its present output, its total revenue is exactly equal to this total cost. The firm is:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → at its break-even point, earning only normal profit
Normal profit is part of the firm’s total cost. If TR just equals this total cost, the firm earns normal profit and nothing more. That is the break-even point.
Option (1) at its break-even point, earning only normal profit — Correct. TR covers all costs, normal profit included.
Option (2) earning a super-normal profit equal to its normal profit — Incorrect. Super-normal profit is profit over and above normal profit. Here there is nothing above it.
Option (3) making a loss equal to its normal profit — Incorrect. Normal profit is already inside total cost, and TR covers it. So there is no loss.
Option (4) at its shut down point, making a loss equal to its total fixed cost — Incorrect. The short run shut down point is the minimum of AVC, where only variable cost is covered. Here all costs are covered.
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. In the long run, a firm does not produce if it earns anything less than the normal profit. In the short run, however, it may produce even if the profit is less than this level. The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” |