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CA Foundation · Business Economics · Price Determination in Different Markets

A firm in a perfectly competitive market sells at a market price of ₹40 per unit. At its present output, marginal cost is ₹40 and rising, and average variable cost is ₹35. What should the firm do in the short run?

The firm should continue at its present output. Price equals rising marginal cost, which is the profit-maximising condition, and price of ₹40 exceeds average variable cost of ₹35, so it covers variable costs and should not shut down. Producing more would make marginal cost exceed price.

  1. AIncrease output because price exceeds average variable cost
  2. BShut down because marginal cost equals price
  3. CContinue producing at the present output, as P = MC and P exceeds AVCCorrect
  4. DReduce output because marginal cost is rising

Explanation

Profit maximisation under perfect competition requires P = MC with MC rising. This is met at the present output. Since P (₹40) exceeds AVC (₹35), the firm covers its variable costs and should keep producing. Raising output would push MC above price and reduce profit.

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