Under perfect competition, for the producer to be in equilibrium:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → AR = MR = MC and MC must be rising.
A firm under perfect competition sells every unit at the market price, so average revenue (AR) = marginal revenue (MR) = price. Its profit is highest where price equals marginal cost (MC) and MC is rising at that output.
Option (1) AR = MR = AC and AC must be rising. — Incorrect. The firm chooses its output by comparing price with marginal cost. Average cost (AC) tells whether the firm earns a profit, and whether it stays in the market in the long run.
Option (2) AR = MR = MC and MC must be falling. — Incorrect. Where MC is falling, it soon drops below the price. The next units then add more to revenue than to cost, so producing more raises profit.
Option (3) AR = MR = TC and TC must be rising. — Incorrect. Total cost (TC) is the cost of the whole output, while AR and MR are per unit. The firm compares price with the cost of one more unit.
Option (4) AR = MR = MC and MC must be rising. — Correct. Producing less would give up units worth more than they cost. Producing more would add units that cost more than the price.
NCERT (2026-27): “4.2 Revenue …Consider the situation when the firm’s output changes from q1 to q2. Given the market price p, 4.3 Profit Maximisation …For profits to be maximum, three conditions must hold at q0:
4.3.1 Condition 1 …In other words, profits are maximum at the level of output (which we have called q0) for which MR = MC |