Assertion (A): Under perfect competition, the short run shut down point of a firm is the minimum point of its AVC curve.
Reason (R): The short run break-even point of a firm is the point of minimum SAC, where the supply curve cuts the SAC curve.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Both statements are true, but they describe two different points. A is about where the firm stops producing; R is about where it earns only normal profit.
Assertion (A): Under perfect competition, the short run shut down point of a firm is the minimum point of its AVC curve. — True. In the short run the firm keeps producing as long as the price is at least the minimum AVC. The last point with positive output is the minimum AVC, where the SMC curve cuts the AVC curve.
Reason (R): The short run break-even point of a firm is the point of minimum SAC, where the supply curve cuts the SAC curve. — True. At the minimum SAC the firm earns only normal profit. That point is its short run break-even point.
Why R does not explain A?
R tells us where the firm just earns normal profit. It says nothing about why the firm stops producing at a lower price.
The real reason for A is the fixed cost. In the short run the firm must pay its TFC even at zero output. So it keeps producing as long as the price covers its AVC. Below the minimum AVC, producing adds a further loss on top of the TFC, so the firm produces nothing.
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.” “4.4.4 The Normal Profit and Break-even Point … The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” |