Assertion:Under perfect competition, in the short run, the firm continues to produce as long as the price remains less than or equal to the minimum of AVC.
Reasoning: 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.
Answer & explanation
Correct answer: option 4
the correct answer is Option4: Assertion (A) is not true but Reasoning (R) is correct.
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Assertion (A) is false because it incorrectly states that the firm continues to produce as long as price (P) is less than or equal to the minimum AVC.
- In reality, a firm in perfect competition continues to produce only if P is greater than or equal to the minimum AVC.
- If P < AVC, the firm incurs losses greater than its fixed costs and should shut down to minimize losses.
- The correct condition for continuing production in the short run is P ≥ AVC.
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Reasoning (R) is true because:
- The shutdown point occurs where the MC curve intersects the AVC curve at its minimum point.
- Below this point, the firm cannot cover its variable costs, so it shuts down.
- As we move down along the supply curve, the last point where the firm produces positive output is at P = AVC_min, which is correctly described in the reasoning.