A price-taking firm’s total variable cost is shown below. The market price is Rs 11.
| Output (units) | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| TVC (Rs) | 14 | 24 | 32 | 39 | 49 | 61 |
How many units will the firm produce in the short run?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 5 units
Price must equal SMC on the rising part of the SMC curve, and price must not be below AVC.
Given:
Price = Rs 11
TVC for 1 to 6 units = Rs 14, 24, 32, 39, 49, 61
SMC from the TVC row: 14, 10, 8, 7, 10, 12
SMC falls to 7 and then rises. Near 2 units, price equals SMC while SMC is falling, so that point is not a maximum: making more units adds profit.
On the rising part, the 5th unit costs Rs 10 (below 11) and the 6th costs Rs 12 (above 11). So the firm produces 5 units.
\( \displaystyle AVC_5 = \frac{49}{5} = 9.8 \lt 11 \)
At 5 units, TR − TVC = 55 − 49 = Rs 6.
Option (1) 2 units — TR − TVC = 22 − 24 = −Rs 2, which is less.
Option (4) 6 units — TR − TVC = 66 − 61 = Rs 5, which is less.
NCERT (2026-27): “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).” “4.3.2 Condition 2 … 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. …” |