A firm under perfect competition has a minimum AVC of Rs 40 in the short run. Its minimum SAC and its minimum LRAC are both Rs 50. The market price is Rs 45 and is expected to stay there. What will the firm do?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Produce in the short run, earning less than normal profit, and leave the market in the long run
Rs 45 is above the minimum AVC (Rs 40) but below the minimum average cost (Rs 50).
Option (1) Produce zero output in the short run, and leave the market in the long run — Incorrect. Zero output in the short run needs price below the minimum AVC; Rs 45 is above Rs 40.
Option (2) Produce in the short run and in the long run, earning only normal profit — Incorrect. Normal profit only would need price at Rs 50, the minimum average cost.
Option (3) Produce zero output in the short run, but produce in the long run once all its costs can be varied — Incorrect. Both parts are reversed: it produces in the short run and stops in the long run.
Option (4) Produce in the short run, earning less than normal profit, and leave the market in the long run — Correct. Price covers AVC, so it produces in the short run, but below normal profit. In the long run it does not stay below normal profit, so it leaves.
NCERT (2026-27): “4.4.1 Short Run Supply Curve of a Firm … Combining cases 1 and 2, we reach an important conclusion. A firm’s short run supply curve is the rising part of the SMC curve from and above the minimum AVC together with zero output for all prices strictly less than the minimum AVC. …” “4.4.4 The Normal Profit and Break-even Point … In the long run, a firm does not produce if it earns anything less than the normal profit. In the short run, however, it may produce even if the profit is less than this level. 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.” |