A firm in a perfectly competitive market has a total fixed cost of Rs 30. Its total variable cost is shown below.
| Output (units) | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| TVC (Rs) | 12 | 20 | 30 | 44 | 62 | 84 |
If the market price is Rs 11, how much will the firm produce in the short run, and what is its profit?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → 3 units; loss of Rs 27
The firm produces where price = SMC on the rising part of SMC, as long as price is not below AVC. In the short run it keeps producing even at a loss, if the loss is smaller than TFC.
Given:
TFC = Rs 30
Price = Rs 11
TVC for 1 to 6 units = Rs 12, 20, 30, 44, 62, 84
SMC from the TVC row: 12, 8, 10, 14, 18, 22
SMC is rising from the 3rd unit. The 3rd unit costs Rs 10 (below 11) and the 4th costs Rs 14 (above 11), so the firm stops at 3 units.
\( \displaystyle AVC_3 = \frac{30}{3} = 10 \lt 11 \)
\( \text{TR} = 11 \times 3 = 33 \)
\( \text{TC} = 30 + 30 = 60 \)
\( \text{Profit} = 33 - 60 = -27 \)
The firm makes a loss of Rs 27. Stopping would lose the whole TFC of Rs 30, so producing 3 units is better.
Option (3) 2 units; loss of Rs 28 — at 2 units the loss is 22 − 50 = Rs 28, more than at 3 units.
NCERT (2026-27): “4.3 Profit Maximisation … For profits to be maximum, three conditions must hold at q0: 1. The price, p, must equal MC 2. Marginal cost must be non-decreasing at q0 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC).” “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. …” |