In the given diagram, which output level is the profit-maximising output of a firm under perfect competition?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → q4
At the profit-maximising output, price must equal MC and MC must not be falling. Price equals MC at q1 and q4, but only at q4 is MC rising.
Option (1) q1 — Incorrect. Here MC is falling. Just to the left of q1, price is below MC, so a slightly smaller output gives more profit.
Option (2) q4 — Correct. Price equals MC and the MC curve is rising.
Option (3) q1 and q4 — Incorrect. q1 fails the second condition, so only q4 is left.
Option (4) q1, q2, q3, q4, q5 and q6 — Incorrect. At q2 and q3 price is above MC; at q5 and q6 MC is above price. Profit can still rise by changing output there.
NCERT (2026-27): “4.3.2 Condition 2 Consider the second condition that must hold when the profit-maximising output level is positive. … Note that at output levels q1 and q4, the market price is equal to the marginal cost. However, at the output level q1, the marginal cost curve is downward sloping. We claim that q1 cannot be a profit-maximising output level. … Observe that for all output levels slightly to the left of q1, the market price is lower than the marginal cost. But, the argument outlined in section 4.3.1 immediately implies that the firm’s profit at an output level slightly smaller than q1 exceeds that corresponding to the output level q1. This being the case, q1 cannot be a profit-maximising output level.”
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