Assertion (A): A profit-maximising competitive firm does not produce at an output where price equals marginal cost but the marginal cost curve slopes downwards.
Reason (R): At outputs slightly smaller than such an output, price is lower than marginal cost, so the firm earns more profit by producing a little less.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Where the MC curve slopes down, producing a little less raises profit. So such an output cannot give the maximum profit, even if p = MC there.
Assertion (A): A profit-maximising competitive firm does not produce at an output where price equals marginal cost but the marginal cost curve slopes downwards. — True. This is the second condition: at the profit-maximising output, MC must be non-decreasing.
Reason (R): At outputs slightly smaller than such an output, price is lower than marginal cost, so the firm earns more profit by producing a little less. — True. MC falls as output rises here, so just to the left of that output MC is above the price.
Why R explains A?
When MR (= p) is less than MC, each extra unit adds more to cost than to revenue, so profit falls as output rises. Read the other way, cutting output a little raises profit. So the output where MC is falling is not the best one, which is what A says.
NCERT (2026-27): “4.3.1 Condition 1 … Therefore, we can conclude that as long as marginal revenue is greater than marginal cost, profits are increasing. By the same logic, as long as marginal revenue is less than marginal cost, profits will fall.” “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. Why? 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.” |