The long run total cost of a firm in a perfectly competitive market is shown below.
| Output (units) | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Long run TC (Rs) | 50 | 80 | 105 | 136 | 180 |
What is the lowest price at which the firm will produce in the long run, and how much will it produce at that price?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs 34; 4 units
In the long run a firm produces only if price covers its average cost. The lowest such price is the minimum of LRAC, the long run shut down point.
Given:
Long run TC for 1 to 5 units = Rs 50, 80, 105, 136, 180
\( \displaystyle LRAC = \frac{TC}{q}: \; 50,\; 40,\; 35,\; 34,\; 36 \)
LRAC is lowest at Rs 34, at 4 units. Below Rs 34 the firm makes a loss at every output and leaves the market.
LRMC of the 2nd to 5th units = Rs 30, 25, 31, 44
Minimum LRAC and minimum LRMC are different points. The lowest LRMC, Rs 25, comes before LRAC reaches its minimum. The shut down price is the minimum of LRAC, where LRMC cuts LRAC from below (between 31 and 44).
NCERT (2026-27): “4.4.3 The Shut Down Point Previously, while deriving the supply curve, we have discussed that in the short run the firm continues to produce as long as the price remains greater than or equal to the minimum of AVC. Therefore, along the supply curve as we move down, the last price-output combination at which the firm produces positive output is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this, there will be no production. This point is called the short run shut down point of the firm. In the long run, however, the shut down point is the minimum of LRAC curve.” “4.3 Profit Maximisation … For profits to be maximum, three conditions must hold at q0: 1. The price, p, must equal MC 2. Marginal cost must be non-decreasing at q0 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC).” |