Microeconomics Class 12 Chapter 4 questions and answers: The theory of the firm under perfect competition ncert solutions
| Textbook | NCERT |
| Class | Class 12 |
| Subject | Economics |
| Chapter | Chapter 4 |
| Chapter Name | The theory of the firm under perfect competition class 12 ncert solutions |
| Category | Ncert Solutions |
| Medium | English |
Are you looking for Ncert Solutions for Class 12 Micro Economics Chapter 4 The theory of the firm under perfect competition? Now you can download Microeconomics class 12 chapter 4 questions and answers pdf from here.
Question 1: What are the characteristics of a perfectly competitive market?
Answer 1: A perfectly competitive market has the following characteristics:
- Many buyers and sellers: There are many sellers and buyers in every category. and No single buyer or seller can influence the market price.
- Homogeneous products: Multiple choices for similar products. Goods offered are identical, with no differentiation.
- Free entry and exit: Firms can freely enter or leave the market without barriers.
- Perfect information: Buyers and sellers have full knowledge of prices and products and are free to make decisions based on their knowledge of the market.
- Price takers: There is no price control, and Firms must accept the market priceas per the market demands and supply chains available; they cannot set their own prices.
- No promotional and selling costs: There are no advertisements and promotional costs incurred by the firms. The selling costs under perfectly competitive market are zero.
Question 2: How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
Answer 2: Total revenue is defined as the total sales proceeds of a producer by selling corresponding level of output. In other words, it is defined as price times the quantity of output sold.
Total Revenue (TR) = Price (P) × Quantity sold (Q)
TR = P × Q
TR = PQ
This relationship means:
- If the price (P) remains constant, total revenue depends directly on the quantity sold.
- If the quantity sold (Q) increases, total revenue will increase as long as the price stays the same.
- In a perfectly competitive market, since the firm is a price taker, P is constant, and the firm’s revenue will vary directly with the quantity sold.
In a perfectly competitive market, the market price is given, i.e., a firm acts as a price taker and cannot influence the price. Hence, a particular firm can influence its TR by altering the quantity of output sold.
Question 3: What is the ‘price line’?
Answer 3: The ‘price line’ refers to a horizontal line in a graph that represents the market price of a good in a perfectly competitive market. It is perfectly horizontal (parallel to the x-axis) because the price does not change with the firm’s output. The price line shows that the firm can sell any quantity of the good at the same market price. The price line also represents the firm’s average revenue (AR) and marginal revenue (MR), which are equal to the market price in perfect competition.
Question 4: Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?
Answer 4: For a price-taking firm, the Average Revenue (AR) is always constant. When AR is constant, Marginal Revenue (MR) is also constant. This means that the Total Revenue (TR) of the firm increases in the same proportion when the price is constant. Therefore, we see a TR curve that slopes upward as a straight line. When the output level is zero, the TR curve passes through the origin.
Question 5: What is the relation between market price and average revenue of a price-taking firm?
Answer 5: For a price-taking firm, the market price and average revenue (AR) are equal. This is because the firm can sell any quantity of its product at the prevailing market price, so each additional unit sold brings in the same revenue as the price. Therefore, the firm’s average revenue, which is total revenue divided by the number of units sold, is always equal to the market price.
Question 6: What is the relation between market price and marginal revenue of a price-taking firm?
Answer 6: For a price-taking firm, the market price and marginal revenue (MR) are equal. Since the firm can sell additional units at the market price without affecting it, the revenue from selling one more unit (marginal revenue) is the same as the price of that unit. Therefore, the firm’s marginal revenue remains constant and is always equal to the market price.
Question 7: What conditions must hold if a profit-maximising firm produces positive output in a competitive market?
Answer 7: For a profit-maximizing firm to produce positive output in a competitive market, the following conditions must hold:
1. MR = MC: Marginal revenue (MR) must equal marginal cost (MC) at the equilibrium output level.
2. MC is rising: Marginal cost must be upward sloping or rising at the equilibrium output level.
3. P ≥ AVC: In the short run, price must be greater than or equal to average variable cost (AVC) at the equilibrium output level.
These conditions ensure that the firm maximizes profit or minimizes loss.
Question 8: Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
Answer 8: There cannot be a positive level of output for profit-maximizing firms when average revenue is not equal to marginal cost because the output will be produced at equilibrium, where marginal revenue is equal to marginal cost.
Question 9: Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation
Answer 9: No, this is not possible. In a perfectly competitive market, the marginal cost curve should keep rising. So, a profit-maximising firm cannot produce a positive level of output when the marginal cost is falling. For a positive level of output, the marginal cost should be rising.
Question 10: Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.
Answer 10: No, a profit-maximizing firm in a competitive market will not produce a positive level of output in the short run if the market price is less than the minimum of average variable cost (AVC). In this situation, the firm would not be able to cover its variable costs, leading to losses greater than its fixed costs. Consequently, the firm would choose to shut down production temporarily to minimize its losses, as it would be more cost-effective to incur only fixed costs rather than producing at a loss.
Question 11: Will a profit-maximising firm in a competitive market produce a positive level of output in the long run if the market price is less than the minimum of AC? Give an explanation
Answer 11: No, a profit-maximizing firm in a competitive market will not produce a positive level of output in the long run if the market price is less than the minimum of average cost (AC). In this scenario, the firm is unable to cover its total costs, resulting in sustained economic losses. In the long run, firms cannot operate indefinitely at a loss, leading them to exit the market. For the firm to remain viable, the market price must be at least equal to the minimum AC, allowing it to earn zero or positive economic profit.
Question 12: What is the supply curve of a firm in the short run?
Answer 12: In the short run, the supply curve of a firm in a competitive market is represented by its marginal cost (MC) curve above the minimum point of the average variable cost (AVC) curve. This means that the firm will supply a positive quantity of output only when the market price is greater than or equal to its minimum AVC. Below this level, the firm will shut down and produce zero output. Thus, the upward-sloping portion of the MC curve reflects the relationship between the price level and the quantity of output the firm is willing to produce, as higher prices incentivize increased production.
Question 13: What is the supply curve of a firm in the long run?
Answer 13: In the long run, the supply curve of a firm in a competitive market is typically represented by the portion of the marginal cost (MC) curve that lies above the long-run average cost (LRAC) curve. Unlike the short-run supply curve, which is influenced by average variable costs, the long-run supply curve reflects the firm’s ability to adjust all inputs and optimize production.
In the long run, firms will enter or exit the market based on economic profits or losses. Therefore, if the market price is equal to the minimum point of the LRAC, firms earn zero economic profit, which indicates a long-run equilibrium. As a result, the long-run supply curve is generally horizontal at the level of the minimum long-run average cost, indicating that firms can supply any quantity at that price without influencing the market price. This reflects the assumption of constant returns to scale in a perfectly competitive market.
Question 14: How does technological progress affect the supply curve of a firm?
Answer 14: The supply curve of a firm is a positive function of a state of technology. Which means if the technology available to the firm appreciates, more amount of output can be produced by the firm with the given levels of capital and labour. Due to the technological advancements, the firm will experience lower cost of production, which will lead the MC curve to the rightward or downward. Thus, due to the appreciation and advancement of production techniques, the firm will produce more and more output that will be supplied at a given market price.
Question 15: How does the imposition of a unit tax affect the supply curve of a firm?
Answer 15: Unit tax is imposed per unit of the output which is sold. The impact of the unit tax is that the cost of production is increased, and as a result, there is an increase in marginal cost. Supply falls due to the rising cost, which makes the supply curve tilt towards the left.
Question 16: How does an increase in the price of an input affect the supply curve of a firm?
Answer 16: An increase in the price of an input increases the cost of production, which in turn increases the marginal cost of the firm. Consequently, the MC curve will shift upward to the left and the supply curve will also shift leftward upward. Therefore, an increase in the input price negatively affects the supply of the firm.
Question 17: How does an increase in the number of firms in a market affect the market supply curve?
Answer 17: The market supply curve is a horizontal summation of all the supply curves of individual firms in the market. If the number of firms in a market increases, then the market supply curve will shift rightward as there will be more number of firms supplying more amount of output.
Question 18: What does the price elasticity of supply mean? How do we measure it?
Answer 18: The price elasticity of supply (PES) measures how responsive the quantity supplied of a good is to a change in its price. It indicates how much the quantity supplied will change in percentage terms when there is a one percent change in price.
Formula for Measuring PES:
The price elasticity of supply is calculated using the following formula:
PES = \(\frac{\%\ \text{Change in Quantity Supplied}}{\%\ \text{Change in Price}}\)
Interpretation of PES Values:
- If PES > 1, supply is elastic, meaning that quantity supplied changes significantly with price changes.
- If PES < 1, supply is inelastic, meaning that quantity supplied changes only slightly with price changes.
- If PES = 1, supply is unitary elastic, indicating that the percentage change in quantity supplied is equal to the percentage change in price.
Question 19: Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.
| Quantity Sold | TR | MR | AR |
| 0 | |||
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| 5 | |||
| 6 |
Answer 19:
| Quantity (Units) | TR = P × Q (Rs) | MR = TR n – TR n – 1 (Rs) | AR = Price (Rs 10) |
| 0 | 10 × 0 = 10 | — | — |
| 1 | 10 × 1 = 10 | 10 – 0 = 10 | 10 |
| 2 | 10 × 2 = 20 | 20 – 10 = 10 | 10 |
| 3 | 10 × 3 = 30 | 30 – 20 = 10 | 10 |
| 4 | 10 × 4 = 40 | 40 – 30 = 10 | 10 |
| 5 | 10 × 5 = 50 | 50 – 40 = 10 | 10 |
| 6 | 10 × 6 = 60 | 60 – 50 = 10 | 10 |
Question 20: The following table shows the total revenue and total cost schedules of a competitive firm. Calculate the profit at each output level. Determine also the market price of the good.
| Quantity Sold | TR (Rs) | TC (Rs) | Profit |
| 0 | 0 | 5 | |
| 1 | 5 | 7 | |
| 2 | 10 | 10 | |
| 3 | 15 | 12 | |
| 4 | 20 | 15 | |
| 5 | 25 | 23 | |
| 6 | 30 | 33 | |
| 7 | 35 | 40 |
Answer 20:
| Quantity (Units) | TR (Rs) | TC (Rs) | Profit (Rs) | MR (Rs) |
| 0 | 0 | 5 | -5 | – |
| 1 | 5 | 7 | -2 | 5 |
| 2 | 10 | 10 | 0 | 5 |
| 3 | 15 | 12 | 3 | 5 |
| 4 | 20 | 15 | 5 | 5 |
| 5 | 25 | 23 | 2 | 5 |
| 6 | 30 | 33 | -3 | 5 |
| 7 | 35 | 40 | -5 | 5 |
Question 21: The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is ₹10. Calculate the profit at each output level. Find the profit maximising level of output.
| Quantity Sold | TC (Rs) |
| 0 | 5 |
| 1 | 15 |
| 2 | 22 |
| 3 | 27 |
| 4 | 31 |
| 5 | 38 |
| 6 | 49 |
| 7 | 63 |
| 8 | 81 |
| 9 | 101 |
| 10 | 123 |
Answer 21:
| Quantity (Units) | Price (Rs) | TC (Rs) | TR (Rs) | Profit |
| 0 | 10 | 5 | 0 | -5 |
| 1 | 10 | 15 | 10 | 5 |
| 2 | 10 | 22 | 20 | -2 |
| 3 | 10 | 27 | 30 | 3 |
| 4 | 10 | 31 | 40 | 9 |
| 5 | 10 | 38 | 50 | 12 |
| 6 | 10 | 49 | 60 | 11 |
| 7 | 10 | 63 | 70 | 7 |
| 8 | 10 | 81 | 80 | -1 |
| 9 | 10 | 101 | 90 | -11 |
| 10 | 10 | 123 | 100 | -23 |
Profit maximisation occurs when the difference between revenue and cost is maximum; in the above table, it occurs in 5 units of output and the profit earned is Rs. 12
Question 22: Consider a market with two firms. The following table shows the supply schedules of the two firms: the SS1 column gives the supply schedule of firm 1 and the SS2 column gives the supply schedule of firm 2. Compute the market supply schedule.
| Price (Rs) | SS1 (units) | SS2 (units) |
| 0 | 0 | 0 |
| 1 | 0 | 0 |
| 2 | 0 | 0 |
| 3 | 1 | 1 |
| 4 | 2 | 2 |
| 5 | 3 | 3 |
| 6 | 4 | 4 |
Answer 22:
| Price (Rs) | SS1 (unit) | SS2 (unit) | SS (Market Supply Schedule) |
| 0 | 0 | 0 | 0 + 0 = 0 |
| 1 | 0 | 0 | 0 + 0 = 0 |
| 2 | 0 | 0 | 0 + 0 = 0 |
| 3 | 1 | 1 | 1 + 1 = 2 |
| 4 | 2 | 2 | 2 + 2 = 4 |
| 5 | 3 | 3 | 3 + 3 = 6 |
| 6 | 4 | 4 | 4 + 4 = 8 |
Question 23: Consider a market with two firms. In the following table, columns labelled as SS1 and SS2 give the supply schedules of firm 1 and firm 2 respectively. Compute the market supply schedule.
| Price (Rs) | SS1 (kg) | SS2 (kg) |
| 0 | 0 | 0 |
| 1 | 0 | 0 |
| 2 | 0 | 0 |
| 3 | 1 | 0 |
| 4 | 2 | 0.5 |
| 5 | 3 | 1 |
| 6 | 4 | 1.5 |
| 7 | 5 | 2 |
| 8 | 6 | 2.5 |
Answer 23:
| Price (Rs) | SS1 (kg) | SS2 (kg) | SS (Market Supply Schedule) |
| 0 | 0 | 0 | 0 |
| 1 | 0 | 0 | 0 |
| 2 | 0 | 0 | 0 |
| 3 | 1 | 0 | 1 |
| 4 | 2 | 0.5 | 2.5 |
| 5 | 3 | 1 | 3 |
| 6 | 4 | 1.5 | 5.5 |
| 7 | 5 | 2 | 7 |
| 8 | 6 | 2.5 | 8.5 |
Question 24: There are three identical firms in a market. The following table shows the supply schedule of firm 1. Compute the market supply schedule.
| Price (Rs) | SS1 (Units) |
| 0 | 0 |
| 1 | 0 |
| 2 | 2 |
| 3 | 4 |
| 4 | 6 |
| 5 | 8 |
| 6 | 10 |
| 7 | 12 |
| 8 | 14 |
Answer 24:
| Price (Rs) | Supply from Firm 1 (SS1) (Units) | Market Supply (SSM) (Units) |
|---|---|---|
| 0 | 0 | 3 × 0 = 0 |
| 1 | 0 | 3 × 0 = 0 |
| 2 | 2 | 3 × 2 = 6 |
| 3 | 4 | 3 × 4 = 12 |
| 4 | 6 | 3 × 6 = 18 |
| 5 | 8 | 3 × 8 = 24 |
| 6 | 10 | 3 × 10 = 30 |
| 7 | 12 | 3 × 12 = 36 |
| 8 | 14 | 3 × 14 = 42 |
Question 25: A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
Answer 25: To calculate the price elasticity of supply, we can use the formula:
\(E_s = \frac{\%\text{ Change in Quantity Supplied}}{\%\text{ Change in Price}}\)
Given Data
- Initial Price (P1) = Rs 10
- Initial Revenue (R1) = Rs 50
- New Price (P2) = Rs 15
- New Revenue (R2) = Rs 150
Calculate Quantity Supplied
To find the quantity supplied at each price, we can use the formula:
Quantity Supplied (Q) = \(\frac{\text{Revenue}}{\text{Price}}\)
- At P1 = Rs 10:
\(Q_1 = \frac{R_1}{P_1} = \frac{50}{10}\) = 5 units - At P2 = Rs 15:
\(Q_2 = \frac{R_2}{P_2} = \frac{150}{15}\) = 10 units
Calculate the Changes
- Change in Quantity Supplied:
ΔQ = Q2 − Q1 = 10 − 5 = 5 units - Change in Price:
ΔP = P2 − P1 = 15 −10 = 5 Rs
Calculate Percentage Changes
- Percentage Change in Quantity Supplied:
- \(\%\Delta Q = \frac{\Delta Q}{Q_1} \times 100 \)
- = \(\frac{5}{5} \times 100 = 100\%\)
- Percentage Change in Price:
- \(\%\Delta P = \frac{\Delta P}{P_1} \times 100 \)
- \(= \frac{5}{10} \times 100 = 50\%\)
Calculate Price Elasticity of Supply
Now we can plug these percentage changes into the elasticity formula:
\(E_s = \frac{\%\Delta Q}{\%\Delta P} \)
\(= \frac{100\%}{50\%} = 2\)
The price elasticity of the firm’s supply curve is 2. This indicates that the firm’s supply is elastic, meaning that the quantity supplied responds significantly to changes in price.
Question 26: The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
Answer 26: To find the initial and final output levels of the firm given the changes in market price and the price elasticity of supply, we can use the formula for price elasticity of supply:
\(E_s = \frac{\%\Delta Q}{\%\Delta P}\)
Where:
- \(E_s\) = price elasticity of supply
- \(\%\Delta Q\) = percentage change in quantity supplied
- \(\%\Delta P\) = percentage change in price
Given Data
- Initial Price \((P_1)\) = Rs 5
- Final Price \((P_2)\) = Rs 20
- Change in Quantity Supplied \((\Delta Q)\) = 15 units
- Price Elasticity of Supply \((E_s)\) = 0.5
Calculate the Percentage Change in Price
First, we need to calculate the percentage change in price:
ΔP = P2 − P1 = 20 − 5 = 15 Rs
\(\%\Delta P = \frac{\Delta P}{P_1} \times 100 \)
\(= \frac{15}{5} \times 100 = 300\%\)
Use the Price Elasticity of Supply to Find Percentage Change in Quantity Supplied
Using the elasticity formula:
\(E_s = \frac{\%\Delta Q}{\%\Delta P}\)
Rearranging gives us:
\(\%\Delta Q = E_s \times \%\Delta P\)
Substituting in the values:
\(\%\Delta Q = 0.5 \times 300\% = 150\%\)
Find the Initial Output Level
Let the initial output level be (Q1). The percentage change in quantity supplied can also be expressed as:
\(\%\Delta Q = \frac{Q_2 – Q_1}{Q_1} \times 100\)
Where (Q2) is the final output level. Since we have \(\%\Delta Q = 150\%\), we can set up the equation:
150 = \(\frac{Q_2 – Q_1}{Q_1} \times 100\)
Rearranging gives us:
\(\frac{Q_2 – Q_1}{Q_1} = 1.5\)
Thus:
\(Q_2 – Q_1 = 1.5 \cdot Q_1\)
This can be rewritten as:
\(Q_2 = 2.5 \cdot Q_1\)
Calculate Final Output Level Using Change in Quantity Supplied
We know that the increase in quantity supplied \((\Delta Q)\) is 15 units:
Q2 − Q1 = 15
Substituting Q2 from the previous equation:
2.5 ⋅ Q1 − Q1 = 15
1.5 ⋅ Q1 = 15
\(Q_1 = \frac{15}{1.5} = 10 \text{ units}\)
Find the Final Output Level
Now we can find (Q2):
\(Q_2 = 2.5 \cdot Q_1 = 2.5 \cdot 10 = 25 \text{ units}\)
- Initial Output Level (Q1): 10 units
- Final Output Level (Q2): 25 units
Question 27: At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 30. The price elasticity of the firm’s supply is 1.25. What quantity ? will the firm supply at the new price?
Answer 27: To determine the quantity that the firm will supply at the new price after a price change, we can use the formula for price elasticity of supply:
\(E_s = \frac{\%\Delta Q}{\%\Delta P}\)
Given Data
- Initial Price \((P_1)\) = Rs 10
- New Price \((P_2)\) = Rs 30
- Initial Quantity Supplied \((Q_1)\) = 4 units
- Price Elasticity of Supply \((E_s)\) = 1.25
Calculate the Change in Price
First, we need to calculate the change in price \((\Delta P)\):
ΔP = P2 − P1 = 30 − 10 = 20 Rs
Calculate the Percentage Change in Price
Next, we calculate the percentage change in price \((\%\Delta P)\):
\(\%\Delta P = \frac{\Delta P}{P_1} \times 100 \)
\(= \frac{20}{10} \times 100 = 200\%\)
Use the Price Elasticity of Supply to Find Percentage Change in Quantity Supplied
Using the elasticity formula, we can rearrange it to find the percentage change in quantity supplied:
\(\%\Delta Q = E_s \times \%\Delta P\)
Substituting in the values:
\(\%\Delta Q = 1.25 \times 200\% = 250\%\)
Find the New Quantity Supplied
The percentage change in quantity supplied can be expressed as:
\(\%\Delta Q = \frac{Q_2 – Q_1}{Q_1} \times 100\)
Where (Q2) is the new quantity supplied. Setting up the equation, we have:
\(250 = \frac{Q_2 – 4}{4} \times 100\)
Rearranging to Solve for (Q2)
Rearranging the equation gives:
\(\frac{Q_2 – 4}{4} = 2.5\)
Multiplying both sides by 4:
\(Q_2 – 4 = 10\)
Adding 4 to both sides:
\(Q_2 = 10 + 4 = 14 \text{ units}\)
At the new price of Rs 30, the firm will supply 14 units of output.