In the short-run, if there is a positive level of output at which a firm's profit is maximised. Which of the following conditions must hold at that output level?
(A) The price must be less than the short-run average cost.
(B) The price must be equal to the short-run marginal cost.
(C) Price must be greater than or equal to the short-run average variable cost.
(D) Short-run marginal costs must be non-decreasing.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), (C) and (D) only
A firm chooses the output that gives it the largest profit, the gap between its total revenue and its total cost. It keeps adding units as long as one more unit adds more to revenue (its marginal revenue) than to cost (its marginal cost). For a perfectly competitive firm, which sells every unit at the given market price, marginal revenue is the price itself. So a positive output maximises profit in the short run only if three conditions hold together:
Price equals marginal cost (p = SMC): before this output one more unit still adds to profit; beyond it, one more unit cuts profit.
Marginal cost is not falling at that output: on a falling stretch of SMC, producing a little more would add more to revenue than to cost.
Price covers average variable cost (p ≥ AVC): otherwise the firm loses less by shutting down and bearing only its fixed cost.
Taking the statements one by one:
(A) The price must be less than the short-run average cost. Incorrect. This is not a condition for maximum profit. Price below short-run average cost means the firm makes a loss; in the short run it may still produce, as long as the price covers average variable cost, but profit maximisation does not require price to be below average cost. Price may equally be above it, with the firm earning supernormal profit.
(B) The price must be equal to the short-run marginal cost. Correct. This is the first condition: for a price-taking firm marginal revenue is the price, so profit is highest where p = SMC.
(C) Price must be greater than or equal to the short-run average variable cost. Correct. If price fell below AVC, the firm would not even recover its wages and raw materials and would lose less by shutting down, so a firm producing a positive output must have p ≥ AVC.
(D) Short-run marginal costs must be non-decreasing. Correct. If SMC were still falling where it equals the price, the next unit would cost less than it brings in, so profit could be raised further; at the profit-maximising output SMC must not be falling.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 19-05 S2* 24-05 S1 | 30-05 S2* | – | – | – |
* A similar question.
NCERT: Introductory Microeconomics — Chapter 4: The Theory of the Firm under Perfect Competition (2025-26)
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