From the following which is incorrect with respect to firm's profit maximization in long run?

Price = Short Run Marginal Cost

The correct answer is Option (3) → Price = Short Run Marginal Cost

Price = Long Run Marginal Cost (LRMC): This statement is correct. For any firm, profit maximization occurs where Marginal Revenue (MR) equals Marginal Cost (MC). In perfect competition, the firm is a price-taker, so Price (P) equals Marginal Revenue (MR). Therefore, the profit-maximizing condition in the long run is P = LRMC.

LRMC is first decreasing and then increasing: This statement is correct. The Long Run Marginal Cost (LRMC) curve typically has a U-shape. This reflects economies of scale (where LRMC decreases as output expands due to increased efficiency) up to a certain point, followed by diseconomies of scale (where LRMC increases as the firm grows too large or complex).

Price = Short Run Marginal Cost (SRMC): This statement is the incorrect one in the context of the defining condition for long-run profit maximization. The SRMC relates to profit maximization given a fixed plant size (short run), whereas LRMC guides the choice of the optimal plant size in the long run.

Price ≥ Long Run Average Variable Cost (LRAVC): This statement is correct. In the long run, all costs are variable, meaning there are no fixed costs. The total cost and the total variable cost therefore, coincide in the long run. Long run average cost (LRAC) is defined as cost per unit of output i.e. TC/q. For a firm to remain in business in the long run, it must at least cover its total average costs. If Price falls below LRAC, the firm would exit the industry to avoid persistent losses. Thus, P ≥ LRAC is a necessary condition for operating in the long run.

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