A firm in a perfectly competitive market produces 100 units at a pric…

A firm in a perfectly competitive market produces 100 units at a price of Rs 40, where its SAC is Rs 36 and its AVC is Rs 30. When the price falls to Rs 32, it produces 80 units, where its AVC is Rs 29.

A. The firm’s total fixed cost is Rs 600.

B. At a price of Rs 40, the firm earns a profit of Rs 400.

C. At a price of Rs 32, the firm’s loss is Rs 320.

D. At a price of Rs 32, the firm should stop production in the short run, since it makes a loss.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → A and B only

Since SAC = AVC + AFC, the gap between SAC and AVC is AFC. In the short run, a firm keeps producing while price is not below AVC, because stopping still costs the whole TFC.

A. The firm’s total fixed cost is Rs 600. — Correct. AFC = 36 − 30 = Rs 6, so TFC = 6 × 100 = Rs 600.

B. At a price of Rs 40, the firm earns a profit of Rs 400. — Correct. Profit = (40 − 36) × 100 = Rs 400.

C. At a price of Rs 32, the firm’s loss is Rs 320. — Incorrect. TC = 600 + 29 × 80 = Rs 2,920 and TR = 32 × 80 = Rs 2,560. The loss is Rs 360, since TFC stays Rs 600 at the lower output.

D. At a price of Rs 32, the firm should stop production in the short run, since it makes a loss. — Incorrect. The price Rs 32 is above AVC (Rs 29). Producing loses Rs 360; stopping would lose the full TFC of Rs 600.

NCERT (2026-27): “4.4.3 The Shut Down Point Previously, while deriving the supply curve, we have discussed that in the short run the firm continues to produce as long as the price remains greater than or equal to the minimum of AVC. Therefore, along the supply curve as we move down, the last price-output combination at which the firm produces positive output is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this, there will be no production. This point is called the short run shut down point of the firm. …”

“4.3.3 Condition 3 … What happens if the firm produces zero output? Since output is zero, TR and TVC are zero as well. Hence, the firm’s profit at zero output is equal to – TFC. …”