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Theory of the Firm under Perfect Competition – CBSE NCERT Study Resources

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12th

12th - Economics

Theory of the Firm under Perfect Competition

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Overview of the Chapter

This chapter explores the behavior of firms operating under perfect competition, a market structure characterized by a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information. The focus is on how firms make decisions regarding output and pricing to maximize profits in the short run and long run.

Perfect Competition: A market structure where numerous small firms compete against each other, selling identical products, with no barriers to entry or exit, and perfect knowledge of market conditions.

Key Concepts

1. Features of Perfect Competition

  • Large number of buyers and sellers
  • Homogeneous products
  • Free entry and exit of firms
  • Perfect knowledge among buyers and sellers
  • No transportation costs

2. Revenue Concepts

  • Total Revenue (TR): Total money received from selling a given quantity of output (TR = P × Q).
  • Average Revenue (AR): Revenue per unit of output sold (AR = TR/Q).
  • Marginal Revenue (MR): Additional revenue from selling one more unit of output (MR = ΔTR/ΔQ).

Price Taker: A firm in perfect competition cannot influence the market price and must accept the prevailing equilibrium price.

3. Profit Maximization in the Short Run

A firm maximizes profit where Marginal Cost (MC) equals Marginal Revenue (MR). The conditions for equilibrium are:

  • MC = MR
  • MC curve cuts MR curve from below

4. Short Run Supply Curve

The portion of the MC curve above the minimum point of the Average Variable Cost (AVC) curve represents the firm's short-run supply curve.

5. Long Run Equilibrium

In the long run, firms earn only normal profits due to free entry and exit. The equilibrium conditions are:

  • P = MC = Minimum AC
  • All firms operate at the lowest point of their Long Run Average Cost (LRAC) curve.

Normal Profit: The minimum level of profit necessary to keep a firm in operation, included in the cost of production.

6. Shutdown Point

A firm will shut down if the price falls below the minimum AVC in the short run. In the long run, it exits if price is below the minimum AC.

Important Graphs and Formulae

  • Total Revenue (TR) = Price (P) × Quantity (Q)
  • Average Revenue (AR) = TR / Q
  • Marginal Revenue (MR) = ΔTR / ΔQ
  • Profit = TR - TC

Graphical representations include the firm's demand curve (perfectly elastic), short-run supply curve, and long-run equilibrium under perfect competition.

All Question Types with Solutions – CBSE Exam Pattern

Explore a complete set of CBSE-style questions with detailed solutions, categorized by marks and question types. Ideal for exam preparation, revision and practice.

Very Short Answer (1 Mark) – with Solutions (CBSE Pattern)

These are 1-mark questions requiring direct, concise answers. Ideal for quick recall and concept clarity.

Question 1:
Define perfect competition.
Answer:
Definition: Market with many buyers/sellers, homogeneous products, free entry/exit.
Question 2:
What is the shape of the demand curve for a firm under perfect competition?
Answer:

Perfectly elastic (horizontal) at market price.

Question 3:
State the profit maximization condition for a firm.
Answer:

MC = MR and MC curve cuts MR from below.

Question 4:
What is shutdown point?
Answer:

Output level where AVC = AR (firm covers only variable costs).

Question 5:
Differentiate between normal profit and supernormal profit.
Answer:
  • Normal: Covers opportunity cost.
  • Supernormal: Excess over normal profit.
Question 6:
Why is TR curve a straight line under perfect competition?
Answer:

Price is constant, so TR increases linearly with output.

Question 7:
How does free entry/exit ensure normal profits in the long run?
Answer:

Firms enter/exit until AR = AC, eliminating supernormal profits.

Question 8:
What happens to equilibrium price if market demand increases?
Answer:

Price rises temporarily until new firms enter.

Question 9:
Give an example of a perfectly competitive market.
Answer:

Agricultural markets (e.g., wheat, rice).

Question 10:
What is the supply curve of a firm in the short run?
Answer:

Portion of MC curve above AVC.

Question 11:
Why is price discrimination not possible under perfect competition?
Answer:

Homogeneous products and perfect knowledge prevent it.

Question 12:
Calculate TR if output is 50 units and price is ₹10.
Answer:

TR = 50 × 10 = ₹500.

Question 13:
When does a firm break-even?
Answer:

When AR = AC (normal profit earned).

Question 14:
How does technological advancement affect long-run supply?
Answer:

Shifts supply curve rightward, reducing costs.

Question 15:
Define perfect competition in the context of market structures.
Answer:

A market structure where numerous buyers and sellers trade homogeneous products, with free entry and exit, and perfect knowledge of market conditions. Prices are determined by market forces of demand and supply.

Question 16:
What is the shape of the demand curve faced by a firm under perfect competition?
Answer:

The demand curve is a horizontal straight line parallel to the X-axis, indicating the firm is a price taker and can sell any quantity at the prevailing market price.

Question 17:
State the condition for profit maximization for a firm under perfect competition.
Answer:

A firm maximizes profit where Marginal Revenue (MR) = Marginal Cost (MC), and the MC curve cuts the MR curve from below.

Question 18:
Why is the Average Revenue (AR) curve equal to the Marginal Revenue (MR) curve under perfect competition?
Answer:

Since the firm sells each unit at the same market price, AR = MR. Both curves coincide as a horizontal line at the equilibrium price level.

Question 19:
What is the significance of the shutdown point for a firm in the short run?
Answer:

The shutdown point occurs when Price (P) = Minimum Average Variable Cost (AVC). Below this, the firm cannot cover variable costs and should temporarily halt production.

Question 20:
Explain why firms under perfect competition are price takers.
Answer:

Due to homogeneous products and large number of sellers, no single firm can influence market price. They accept the price determined by industry demand and supply.

Question 21:
What happens to supernormal profits in the long run under perfect competition?
Answer:

Supernormal profits attract new firms, increasing supply until Price = Minimum Average Cost (AC), eliminating supernormal profits and restoring normal profits.

Question 22:
How does free entry and exit of firms affect market equilibrium in perfect competition?
Answer:

It ensures zero economic profit in the long run, as firms enter or exit until Price = AC, maintaining efficient resource allocation.

Question 23:
Define marginal cost and state its role in output determination.
Answer:

Marginal Cost (MC) is the change in total cost from producing one additional unit. Firms produce where MC = MR to maximize profit or minimize losses.

Question 24:
Why is the supply curve of a firm under perfect competition the same as its MC curve above AVC?
Answer:

Because the firm supplies output where P = MC (profit-maximizing condition). Below AVC, it shuts down, making MC the supply curve only above AVC.

Question 25:
What is the break-even point for a firm under perfect competition?
Answer:

The output level where Price = Minimum Average Cost (AC), ensuring the firm covers all costs, earning only normal profit in the long run.

Very Short Answer (2 Marks) – with Solutions (CBSE Pattern)

These 2-mark questions test key concepts in a brief format. Answers are expected to be accurate and slightly descriptive.

Question 1:
Why is the marginal revenue (MR) curve of a perfectly competitive firm equal to its average revenue (AR) curve?
Answer:

In perfect competition, since the firm is a price taker, every additional unit sold adds the same amount to total revenue. Thus, MR remains constant and equal to AR, making both curves coincide as a horizontal line.

Question 2:
What is the significance of the shutdown point for a firm in perfect competition?
Answer:

The shutdown point occurs when a firm's average variable cost (AVC) equals the market price. Below this point, the firm cannot cover its variable costs and should temporarily shut down to minimize losses.

Question 3:
Differentiate between normal profit and supernormal profit in perfect competition.
Answer:
  • Normal profit occurs when Total Revenue = Total Cost, covering both explicit and implicit costs.
  • Supernormal profit arises when Total Revenue > Total Cost, allowing the firm to earn excess returns.
Question 4:
Explain why firms in perfect competition are called price takers.
Answer:

Firms in perfect competition are price takers because the market price is determined by industry demand and supply. Individual firms are too small to influence price and must accept the prevailing market price.

Question 5:
What happens to the economic profit of firms in perfect competition in the long run?
Answer:

In the long run, due to free entry and exit, firms in perfect competition earn only normal profit. Any supernormal profit attracts new firms, increasing supply and driving prices down until economic profit is zero.

Question 6:
How does the supply curve of a firm under perfect competition relate to its MC curve?
Answer:

The supply curve of a perfectly competitive firm is the portion of its Marginal Cost (MC) curve that lies above the AVC curve. This is because the firm supplies output only when price ≥ AVC.

Question 7:
Why is the long-run equilibrium of a firm in perfect competition considered efficient?
Answer:

In the long run, firms produce at the minimum point of the LRAC curve, ensuring productive efficiency. Additionally, price equals marginal cost (P = MC), achieving allocative efficiency.

Question 8:
What role does homogeneous products play in perfect competition?
Answer:

Homogeneous products ensure that no firm can differentiate its goods, making consumers indifferent between sellers. This leads to a single market price and eliminates non-price competition.

Short Answer (3 Marks) – with Solutions (CBSE Pattern)

These 3-mark questions require brief explanations and help assess understanding and application of concepts.

Question 1:
Define perfect competition and list any two features of this market structure.
Answer:

Perfect competition is a market structure where numerous buyers and sellers trade homogeneous products with perfect information and no barriers to entry or exit. Two key features are:

  • Homogeneous products: All firms sell identical goods, making branding irrelevant.
  • Price takers: Individual firms cannot influence market price due to negligible market share.
Question 2:
Explain why the average revenue (AR) curve of a firm under perfect competition is a horizontal straight line.
Answer:

Under perfect competition, the average revenue (AR) curve is horizontal because firms are price takers. The market price is determined by industry demand and supply, and each firm sells all units at this fixed price. Thus, AR = Price = Marginal Revenue (MR), resulting in a straight line parallel to the x-axis.

Question 3:
Differentiate between shut-down point and break-even point for a firm in the short run under perfect competition.
Answer:

  • Shut-down point: Occurs when price falls below average variable cost (AVC). The firm covers only variable costs and minimizes losses by stopping production.
  • Break-even point: Occurs when price equals average total cost (ATC). The firm covers all costs (fixed + variable) and earns zero economic profit.

Question 4:
How does the long-run equilibrium of a firm under perfect competition differ from its short-run equilibrium?
Answer:

In the long-run equilibrium, firms earn only normal profits (zero economic profit) due to free entry and exit, whereas in the short run, they may earn supernormal profits or incur losses. Additionally, in the long run, firms operate at the minimum point of their LRAC curve, ensuring productive efficiency.

Question 5:
Why is the marginal cost (MC) curve considered the supply curve of a perfectly competitive firm in the short run?
Answer:

The MC curve above the AVC represents the supply curve because a profit-maximizing firm produces where P = MC. If price rises, the firm expands output along the MC curve, and vice versa. Below AVC, the firm shuts down, so no supply exists.

Question 6:
Describe the impact of an increase in market demand on the equilibrium of a perfectly competitive industry in the long run.
Answer:

  • Initially, higher demand raises price, leading to supernormal profits for existing firms.
  • New firms enter the industry, increasing supply and lowering price back to the original level.
  • Long-run equilibrium restores at the initial price but with more firms and higher total output.

Question 7:
Explain the concept of perfect competition in the market structure with its key features.
Answer:

In perfect competition, a market structure consists of a large number of buyers and sellers trading homogeneous products with perfect knowledge and free entry/exit. Key features include:

  • Large number of buyers and sellers: No single entity can influence the market price.
  • Homogeneous products: Goods are identical, eliminating brand preference.
  • Free entry and exit: Firms can join or leave the market without restrictions.
  • Perfect information: All participants have complete knowledge of prices and products.
  • Price taker: Firms accept the market-determined price.
Question 8:
Differentiate between firm and industry in the context of perfect competition.
Answer:

In perfect competition:

  • Firm: Refers to a single producer or seller of a good/service. It is a small part of the industry and has no control over price.
  • Industry: Comprises all firms producing identical goods. It determines the market price through collective supply and demand.

The firm is a price taker, while the industry sets the equilibrium price based on market forces.

Question 9:
Why is the demand curve for a perfectly competitive firm perfectly elastic? Explain with a diagram.
Answer:

The demand curve for a perfectly competitive firm is perfectly elastic (horizontal) because:

  • The firm sells homogeneous products at the market price.
  • It can sell any quantity at this price but cannot charge higher, as buyers will shift to competitors.

Diagrammatically:
Price (P) is on the Y-axis, Quantity (Q) on the X-axis.
The demand curve (D) is a horizontal line at the market price (Pe), indicating infinite elasticity.

Question 10:
Describe the shutdown point for a firm under perfect competition. How is it determined?
Answer:

The shutdown point occurs when a firm's revenue from production cannot cover its variable costs, making it better to halt operations temporarily. It is determined where:

  • Price (P) = Minimum Average Variable Cost (AVC).
  • At this point, the firm incurs losses equal to fixed costs whether it operates or not.

Continuing below this point increases losses, as revenue fails to cover even variable expenses.

Question 11:
What is the significance of the break-even point in perfect competition? Illustrate with a condition.
Answer:

The break-even point is where a firm covers all its costs, earning zero economic profit. It is significant because:

  • Firms continue production as they cover both fixed and variable costs.
  • It marks the threshold for long-term sustainability.

Condition:
Price (P) = Minimum Average Total Cost (ATC).
At this point, Total Revenue (TR) = Total Cost (TC), ensuring no losses or supernormal profits.

Question 12:
Explain how a perfectly competitive firm achieves long-run equilibrium. What conditions must hold?
Answer:

In long-run equilibrium, a perfectly competitive firm achieves:

  • Normal profits (zero economic profit), where Price (P) = Minimum Long-Run Average Cost (LRAC).
  • Optimal scale: Firms operate at the lowest point of the LRAC curve, ensuring productive efficiency.
  • Free entry/exit ensures no supernormal profits or losses persist.

Conditions:
P = MR = MC = LRAC.
This balance ensures allocative and productive efficiency in the market.

Question 13:
Define perfect competition and list its three key characteristics.
Answer:

Perfect competition is a market structure where numerous buyers and sellers trade homogeneous products with perfect information and no barriers to entry or exit. Its three key characteristics are:

  • Large number of buyers and sellers: No single entity can influence the market price.
  • Homogeneous products: All firms sell identical goods, making differentiation impossible.
  • Free entry and exit: Firms can join or leave the market without restrictions.
Question 14:
Explain why a firm under perfect competition is a price taker.
Answer:

A firm under perfect competition is a price taker because it has no control over the market price. This occurs due to:

  • Large number of sellers: Each firm's output is negligible compared to the total market supply.
  • Homogeneous products: Consumers see no difference between products, forcing firms to accept the prevailing market price.

Thus, the firm can only adjust its quantity of output, not the price.

Question 15:
What is the shape of the demand curve faced by a firm in perfect competition? Justify your answer.
Answer:

The demand curve faced by a firm in perfect competition is perfectly elastic (horizontal). This is because:

  • The firm sells at the market-determined price, which it cannot influence.
  • At any price above the equilibrium, demand drops to zero as buyers switch to other identical products.
  • At the market price, the firm can sell any quantity it produces.
Question 16:
Differentiate between normal profit and supernormal profit in the context of perfect competition.
Answer:

Normal profit is the minimum earnings required to keep a firm in the industry, covering both explicit and implicit costs. Supernormal profit is any earnings above normal profit. Key differences:

  • Normal profit: Occurs when AR = AC, indicating no incentive for firms to enter or exit.
  • Supernormal profit: Occurs when AR > AC, attracting new firms due to free entry.

In the long run, perfect competition eliminates supernormal profits.

Question 17:
Describe the shutdown point for a firm under perfect competition.
Answer:

The shutdown point is the output level where a firm covers only its average variable cost (AVC) and incurs losses equal to fixed costs. Key features:

  • Firm's price = minimum AVC.
  • Continuing production minimizes losses (equal to fixed costs).
  • Below this point, the firm shuts down as losses exceed fixed costs.

It is a short-run decision to avoid further losses.

Long Answer (5 Marks) – with Solutions (CBSE Pattern)

These 5-mark questions are descriptive and require detailed, structured answers with proper explanation and examples.

Question 1:
Explain the shutdown point of a firm under perfect competition using average variable cost (AVC) and price. How does it differ from the break-even point?
Answer:
Theoretical Framework

In perfect competition, the shutdown point occurs when a firm's revenue falls below its AVC, forcing it to halt production. Our textbook shows this happens when Price (P) < AVC, as continuing operations would increase losses.

Evidence Analysis
  • Example 1: A farmer stops wheat cultivation if market price drops below harvesting costs.
  • Example 2: Small manufacturers close when raw material costs exceed sales revenue.
Critical Evaluation

Unlike the break-even point (where P=ATC), shutdown focuses on minimizing losses rather than covering total costs. This distinction is crucial for short-term decision-making.

Question 2:
Analyze how technological advancement affects the supply curve of firms in perfect competition. Provide two real-world examples.
Answer:
Theoretical Framework

Technological progress shifts the supply curve rightward by lowering production costs. We studied how this increases output at each price level under perfect competition.

Evidence Analysis
  • Example 1: GPS-guided tractors increased agricultural yields by 20% (NCERT data).
  • Example 2: Automated looms reduced textile production costs by 30%.
Critical Evaluation

While technology boosts supply, small firms may struggle with adoption costs. This creates competitive pressure to modernize or exit the market.

Question 3:
Compare short-run and long-run equilibrium of a firm under perfect competition using marginal cost (MC) and average cost (AC) curves.
Answer:
Theoretical Framework

In short-run, equilibrium occurs where P=MC (with possible supernormal profits). Long-run equilibrium requires P=MC=AC due to free entry/exit.

Evidence Analysis
PeriodConditionProfit Status
Short-runP>ACSupernormal
Long-runP=ACNormal
Critical Evaluation

The transition demonstrates how market forces eliminate economic profits, a unique feature of perfect competition we analyzed through textbook diagrams.

Question 4:
Evaluate the statement: 'A perfectly competitive firm is both price-taker and quantity-adjuster.' Support with marginal revenue (MR) analysis.
Answer:
Theoretical Framework

As price-taker, the firm accepts market price (P=MR=AR). Being quantity-adjuster, it produces where MR=MC for profit maximization.

Evidence Analysis
  • Example 1: Wheat farmers sell at global prices while optimizing acreage.
  • Example 2: Street food vendors adjust daily output based on fixed meal prices.
Critical Evaluation

This dual behavior creates perfectly elastic demand curves - a fundamental characteristic we verified through equilibrium diagrams in class.

Question 5:
Discuss how entry and exit of firms leads to normal profits in long-run perfect competition. Illustrate with industry supply curve shifts.
Answer:
Theoretical Framework

Our textbook shows that supernormal profits attract new firms, shifting industry supply right until P=AC. Conversely, losses trigger exits until normal profits restore.

Evidence Analysis
  • Example 1: Mobile repair shops proliferated during high-demand periods.
  • Example 2: Many kirana stores closed during organized retail expansion.
Critical Evaluation

This self-correcting mechanism ensures zero economic profit in long-run - a defining feature we studied through [Diagram: Market Adjustment Process].

Question 6:
Explain the concept of perfect competition and discuss its key characteristics with suitable examples.
Answer:

In economics, perfect competition refers to a market structure where numerous buyers and sellers interact, trading identical products with no barriers to entry or exit. The key characteristics of perfect competition are:

  • Large number of buyers and sellers: No single buyer or seller can influence the market price. Example: Agricultural markets where many farmers sell homogeneous products like wheat.
  • Homogeneous products: Goods sold are identical in quality, features, and pricing. Example: Raw materials like salt or sugar.
  • Free entry and exit: Firms can join or leave the market without restrictions, ensuring no long-term profits. Example: Small-scale local vendors.
  • Perfect knowledge: All participants have complete information about prices and products. Example: Stock markets where prices are publicly available.
  • Price takers: Firms accept the market-determined price and cannot set their own. Example: A farmer selling rice at the prevailing market rate.

This structure ensures efficiency, as resources are allocated optimally, and consumers benefit from the lowest possible prices.

Question 7:
Analyze the short-run equilibrium of a firm under perfect competition using the marginal cost and marginal revenue approach. Support your answer with a diagram.
Answer:

In the short run, a firm under perfect competition achieves equilibrium when it maximizes profit or minimizes loss. This occurs where Marginal Cost (MC) equals Marginal Revenue (MR), and MC is rising.


Steps to determine equilibrium:
1. The firm faces a horizontal demand curve (AR = MR = Price) as it is a price taker.
2. The MC curve is U-shaped due to diminishing returns.
3. Equilibrium output (Qe) is where MC = MR.
4. If Price (P) > Average Cost (AC) at Qe, the firm earns supernormal profits.
5. If P < AC but > Average Variable Cost (AVC), the firm continues production to cover variable costs.
6. If P < AVC, the firm shuts down to minimize losses.


Diagram: (Draw a graph with Quantity on X-axis and Cost/Revenue on Y-axis)
- Show MC, MR, AC, and AVC curves.
- Mark equilibrium at MC = MR.
- Shade the profit/loss area between P and AC at Qe.


Example: A wheat farmer produces where MC = MR (market price). If the price is ₹20/kg and AC is ₹15/kg, the farmer earns a profit of ₹5/kg.

Question 8:
Compare the long-run equilibrium of a firm under perfect competition with that of a monopoly. Highlight the implications for consumers and society.
Answer:

The long-run equilibrium under perfect competition and monopoly differs significantly in terms of efficiency, pricing, and welfare.


Perfect Competition:
- Firms produce at the minimum point of the Long-Run Average Cost (LRAC) curve (productive efficiency).
- Price equals MC (allocative efficiency), ensuring optimal resource allocation.
- Zero economic profits due to free entry/exit.
- Consumers benefit from low prices and high output.


Monopoly:
- Firms produce where MR = MC but charge a price higher than MC.
- Output is lower, and price is higher than in perfect competition.
- Excess profits persist due to barriers to entry.
- Deadweight loss occurs, reducing societal welfare.


Implications:
- Perfect competition promotes consumer surplus and social welfare, while monopolies lead to inefficiency and inequality.
- Example: Telecom sector (competitive) offers lower tariffs than a monopolistic utility provider.

Question 9:
Explain the concept of perfect competition in the market structure. Discuss the characteristics of a perfectly competitive market with suitable examples.
Answer:

In economics, perfect competition refers to a market structure where there are a large number of buyers and sellers, all dealing in identical products, with no barriers to entry or exit. Under this structure, no single firm or consumer can influence the market price, making it an ideal benchmark for efficiency.

Characteristics of a perfectly competitive market:

  • Large number of buyers and sellers: Each participant is so small that their individual actions do not affect the market price. For example, the agricultural market for wheat or rice, where numerous farmers sell homogeneous products.
  • Homogeneous products: All firms sell identical goods, meaning consumers have no preference for one seller over another. An example is the market for raw cotton.
  • Free entry and exit: Firms can join or leave the market without restrictions, ensuring no long-term economic profits. This is seen in small-scale local vegetable markets.
  • Perfect knowledge: Buyers and sellers have complete information about prices and product quality, eliminating unfair advantages. Online stock trading platforms approximate this condition.
  • Price takers: Firms accept the market-determined price and cannot set their own. For instance, a single farmer cannot influence the price of potatoes in a wholesale market.

Perfect competition ensures allocative and productive efficiency, as resources are optimally utilized, and goods are produced at the lowest possible cost. However, real-world markets rarely meet all these conditions perfectly.

Question 10:
Explain the shutdown point of a firm under perfect competition in the short run. How is it determined? Illustrate with a suitable diagram.
Answer:

In the short run, the shutdown point is the level of output where a firm decides to stop production temporarily because it can no longer cover its variable costs. This occurs when the price (P) falls below the minimum average variable cost (AVC).

The shutdown point is determined by the following condition:
P = Minimum AVC
If P is less than AVC, the firm cannot recover even its variable costs, making it rational to shut down and bear only the fixed costs.

Diagram Explanation:
1. Draw the MC, ATC, and AVC curves for a firm under perfect competition.
2. The shutdown point is where the MC curve intersects the AVC curve at its lowest point.
3. If the market price (P) touches this point, the firm is indifferent between producing and shutting down.

Key Insight: Even at the shutdown point, the firm incurs losses equal to fixed costs, but continuing production would worsen the losses by adding variable costs.

Question 11:
Explain the concept of perfect competition in the market structure. Discuss the features of a perfectly competitive market and how it influences the firm's decision-making process.
Answer:

In economics, perfect competition refers to a market structure where numerous small firms compete against each other, selling identical products, with no single firm having the power to influence the market price. Below are the key features of a perfectly competitive market:

  • Large number of buyers and sellers: No individual buyer or seller can affect the market price.
  • Homogeneous products: All firms sell identical goods, making them perfect substitutes.
  • Free entry and exit: Firms can enter or exit the market without any restrictions.
  • Perfect knowledge: All participants have complete information about prices and products.
  • Price takers: Firms accept the market price as given and cannot influence it.

In such a market, firms are price takers, meaning they must accept the equilibrium price determined by market demand and supply. The firm's decision-making revolves around producing the quantity where Marginal Cost (MC) = Marginal Revenue (MR) to maximize profits. Since the price is fixed, firms focus on cost efficiency and output adjustments rather than pricing strategies.

Additionally, in the long run, firms in perfect competition earn only normal profits due to free entry and exit. If firms earn supernormal profits, new entrants will increase supply, driving prices down until only normal profits remain. This ensures allocative and productive efficiency in the market.

Question 12:
Explain the concept of shutdown point for a firm under perfect competition. How is it determined? Illustrate with a suitable diagram.
Answer:

In the theory of the firm under perfect competition, the shutdown point refers to the level of output where a firm decides to temporarily halt production because it can no longer cover its variable costs. At this point, continuing production would lead to greater losses than shutting down.

The shutdown point is determined when the firm's average revenue (AR) equals its average variable cost (AVC). Mathematically, this occurs when AR = AVC. If the price (AR) falls below AVC, the firm minimizes losses by shutting down because it cannot even cover its variable costs like labor and raw materials.

Diagram:
1. Draw the standard cost and revenue curves for a perfectly competitive firm.
2. Label the AVC curve and the AR curve (which is also the demand curve, as AR = MR = Price in perfect competition).
3. The shutdown point is where the AR curve touches the minimum point of the AVC curve. Below this point, the firm shuts down.

Key Insight: Even at the shutdown point, the firm incurs fixed costs, but it avoids additional variable costs. This decision is short-term; the firm may resume production if market conditions improve.

Question 13:
Explain the concept of perfect competition in the market structure. Discuss the characteristics of a perfectly competitive market and how it influences the price determination and output decisions of a firm.
Answer:

Perfect competition is a market structure where a large number of buyers and sellers operate, dealing with identical products, and no single entity has the power to influence the market price. The key characteristics of a perfectly competitive market are:

  • Large number of buyers and sellers: No individual buyer or seller can affect the market price.
  • Homogeneous products: All firms sell identical goods, ensuring no product differentiation.
  • Free entry and exit: Firms can enter or exit the market without any restrictions.
  • Perfect knowledge: All participants have complete information about prices, costs, and market conditions.
  • Price takers: Firms accept the market price as given and cannot influence it.

In such a market, the price determination occurs at the intersection of the industry's demand and supply curves, establishing the equilibrium price. Individual firms must accept this price and adjust their output decisions to maximize profit where Marginal Cost (MC) equals Marginal Revenue (MR). Since the price is constant, the firm's demand curve is perfectly elastic (horizontal line at the market price).

For example, if the market price is ₹50 per unit, the firm will produce the quantity where MC = MR = ₹50. If the firm produces less, it misses out on potential profit, and if it produces more, it incurs losses due to higher MC. Thus, perfect competition ensures efficient resource allocation and optimal output levels in the long run.

Question 14:
Explain the concept of profit maximization for a firm under perfect competition in the short run. Use appropriate diagrams to support your answer.
Answer:

In a perfectly competitive market, a firm aims to maximize its profit by producing the quantity of output where the difference between Total Revenue (TR) and Total Cost (TC) is the greatest. This occurs at the point where Marginal Revenue (MR) equals Marginal Cost (MC), and MC is rising.

Steps to determine profit maximization:
1. Identify the MR = MC point on the graph.
2. Ensure MC is rising at this point (to avoid loss minimization).
3. The corresponding output level is the profit-maximizing quantity.

Diagram Explanation:
The diagram should include:
- MC curve (U-shaped)
- MR curve (horizontal, equal to price in perfect competition)
- ATC curve (to show profit or loss)
The intersection of MR and MC determines the equilibrium output. If P > ATC, the firm earns supernormal profit; if P = ATC, it earns normal profit; and if P < ATC, it incurs a loss but continues production if P > AVC.

Key Takeaway: Profit maximization is achieved when the firm produces at the output level where MR = MC, ensuring optimal resource allocation under perfect competition.

Question 15:
Explain the concept of perfect competition in the market structure. Discuss its key features and how it influences the pricing and output decisions of a firm.
Answer:

Perfect competition is a market structure characterized by a large number of buyers and sellers, homogeneous products, free entry and exit, perfect knowledge, and no government intervention. It is considered the most ideal market form due to its efficiency and fairness.

Key features of perfect competition:

  • Large number of buyers and sellers: No single buyer or seller can influence the market price.
  • Homogeneous products: All firms sell identical products, making branding irrelevant.
  • Free entry and exit: Firms can enter or leave the market without restrictions.
  • Perfect knowledge: Buyers and sellers have complete information about prices and products.
  • Price takers: Firms accept the market price as given and cannot influence it.

Impact on pricing and output decisions:

In perfect competition, firms are price takers, meaning they sell their output at the prevailing market price. The demand curve for an individual firm is perfectly elastic (horizontal). The firm maximizes profit by producing the quantity where Marginal Cost (MC) = Marginal Revenue (MR), which is also equal to the market price. Since there is no scope for abnormal profits in the long run due to free entry and exit, firms earn only normal profits.

This structure ensures allocative and productive efficiency, as resources are optimally utilized, and goods are produced at the lowest possible cost.

Question 16:
Differentiate between short-run and long-run equilibrium of a firm under perfect competition. Use diagrams to support your answer.
Answer:

Short-run equilibrium refers to the period where at least one factor of production is fixed, while long-run equilibrium occurs when all factors are variable, allowing firms to adjust their scale of production.

Short-run equilibrium:

  • Firms can earn supernormal profits, normal profits, or incur losses.
  • Equilibrium is achieved when MC = MR, and MC is rising.
  • The firm may continue production even if it incurs losses, as long as it covers its average variable cost (AVC).

Diagram for short-run equilibrium (Supernormal Profit):
[Insert Diagram: A graph with MC, ATC, and MR curves, showing MR = MC above ATC, indicating supernormal profit.]

Long-run equilibrium:

  • Due to free entry and exit, firms earn only normal profits.
  • Equilibrium occurs where MC = MR = ATC, and the firm operates at the minimum point of the ATC curve.
  • All inefficient firms exit, and only the most efficient firms survive.

Diagram for long-run equilibrium (Normal Profit):
[Insert Diagram: A graph with MC, ATC, and MR curves, showing MR = MC = ATC at the minimum point of ATC.]

Key difference: In the short run, firms can earn supernormal profits or losses, but in the long run, only normal profits are sustained due to market adjustments.

Case-based Questions (4 Marks) – with Solutions (CBSE Pattern)

These 4-mark case-based questions assess analytical skills through real-life scenarios. Answers must be based on the case study provided.

Question 1:
A firm under perfect competition faces a fixed market price of ₹50 per unit. Its total cost function is TC = 100 + 10Q + 0.5Q². Analyze: (a) Profit-maximizing output level (b) Economic profit or loss at equilibrium.
Answer:
Case Deconstruction

Given: P = ₹50, TC = 100 + 10Q + 0.5Q². We studied that firms maximize profit where MR = MC.

Theoretical Application
  • MR = P = ₹50 (perfect competition)
  • MC = dTC/dQ = 10 + Q
  • Set MR = MC: 50 = 10 + Q → Q = 40 units
Critical Evaluation

At Q=40, TR = 50×40 = ₹2000, TC = 100 + 10(40) + 0.5(40)² = ₹1300. Economic profit = TR-TC = ₹700. Our textbook shows this confirms short-run supernormal profits.

Question 2:
The short-run supply curve of a perfectly competitive firm is given by P = 20 + 4Q for P ≥ AVC. If market price is ₹60: (a) Calculate producer surplus (b) Explain why this firm will continue production.
Answer:
Case Deconstruction

Supply curve P = 20 + 4Q implies MC curve. At P=₹60, we find equilibrium output.

Theoretical Application
  • Set P=MC: 60 = 20 + 4Q → Q=10 units
  • Producer surplus = (60×10) - ∫(20+4Q)dQ from 0-10 = ₹200
Critical Evaluation

Since P=60 > AVC=20 (from supply condition), the firm covers variable costs. Our textbook examples show this meets the shutdown point criteria.

Question 3:
Industry data shows 1,000 identical firms in perfect competition with each having TC = 50Q - 10Q² + Q³. Derive: (a) Long-run equilibrium price (b) Number of firms when market demand shifts to Qᴰ = 10,000 - 200P.
Answer:
Case Deconstruction

Long-run equilibrium requires P = min AC. We first find AC from TC.

Theoretical Application
  • AC = TC/Q = 50 - 10Q + Q²
  • dAC/dQ = -10 + 2Q = 0 → Q=5 → AC=25
  • Thus P=₹25 (long-run price)
Critical Evaluation

At P=25, Qᴰ=10,000-200(25)=5,000. With each firm producing 5 units, new firms = 5,000/5 = 1,000. This matches our constant cost industry analysis.

Question 4:
A price-taking firm has TR = 100Q and TC = Q³ - 10Q² + 45Q + 100. Determine: (a) Output range for profit maximization (b) Whether the firm operates in short-run when P=₹30.
Answer:
Case Deconstruction

Profit maximization requires MR = MC and MC rising. Given TR=100Q → P=₹100.

Theoretical Application
  • MC = dTC/dQ = 3Q² - 20Q + 45
  • Set MR=MC: 100 = 3Q² - 20Q + 45 → Q≈7.6 units
Critical Evaluation

At P=30, check AVC = (Q³-10Q²+45Q)/Q = Q²-10Q+45. Minimum AVC=₹20 at Q=5. Since 30>20, firm continues production as per shutdown rule.

Question 5:
A firm under perfect competition faces a horizontal demand curve. Analyze how this impacts its revenue structure and profit maximization in the short run.
Answer:
Case Deconstruction

In perfect competition, the demand curve is horizontal as firms are price takers. This means AR = MR at the market price.

Theoretical Application
  • Since MR = AR, total revenue increases linearly with output.
  • Profit maximization occurs where MR = MC, as per our textbook.
Critical Evaluation

Example: A wheat farmer sells at ₹20/kg. Even if output rises, price remains unchanged, ensuring stable AR.

Question 6:
Using a cost-revenue diagram, explain why a perfectly competitive firm may continue production even at a loss in the short run.
Answer:
Case Deconstruction

When AVC < P < ATC, the firm covers variable costs but not fixed costs.

Theoretical Application
  • Continuing production minimizes losses (shutdown point is where P = AVC).
  • [Diagram: Firm’s equilibrium showing loss area between ATC and price line.]
Critical Evaluation

Example: A taxi driver operates at ₹50/km despite ₹60/km ATC, as ₹45/km covers AVC.

Question 7:
Compare the long-run equilibrium of a firm under perfect competition versus monopoly using economic efficiency criteria.
Answer:
Case Deconstruction

Perfect competition achieves allocative efficiency (P = MC), while monopolies restrict output.

Theoretical Application
CriteriaPerfect CompetitionMonopoly
OutputHigherLower
PriceLowerHigher
Critical Evaluation

Example: Telecom markets (competitive) offer cheaper rates than monopolistic utilities.

Question 8:
Discuss how technological advancement affects the supply curve and market equilibrium for firms in perfect competition.
Answer:
Case Deconstruction

Technology lowers MC, shifting the supply curve rightward.

Theoretical Application
  • Market supply increases, reducing equilibrium price.
  • Firms adopt innovation to survive, as per our textbook.
Critical Evaluation

Example: Solar panel producers reduced costs by 80% since 2010, increasing industry output.

Question 9:
A perfectly competitive firm faces a market price of ₹50 per unit. Its total cost function is TC = 100 + 10Q + 0.5Q². Analyze whether the firm should continue production in the short run.
Answer:
Case Deconstruction

We studied that firms continue production if price ≥ AVC. Here, VC = 10Q + 0.5Q², so AVC = 10 + 0.5Q.


Theoretical Application
  • At profit-maximizing output (MR=MC), MC = 10 + Q = 50 → Q = 40
  • AVC at Q=40: 10 + 0.5(40) = ₹30

Critical Evaluation

Since P(₹50) > AVC(₹30), the firm should continue operations despite fixed costs. Our textbook shows similar examples where covering variable costs justifies short-run production.

Question 10:
The market supply curve for wheat shifts rightward due to new farming technology. Examine how this affects equilibrium under perfect competition, using current MSP data.
Answer:
Case Deconstruction

We know rightward supply shift increases quantity and decreases price in perfect competition.


Theoretical Application
BeforeAfter
Price: ₹2,015 (MSP 2023)Price: ₹1,950
Qty: 100mn tonsQty: 120mn tons

Critical Evaluation

As per NCERT, this benefits consumers but may reduce farmers' revenue if demand is inelastic. Current data shows similar trends when Minimum Support Prices face oversupply.

Question 11:
Compare short-run and long-run equilibrium of a perfectly competitive firm when market demand increases suddenly.
Answer:
Case Deconstruction

We studied that demand shocks create temporary profits in short-run but normal profits in long-run.


Theoretical Application
  • Short-run: Price rises → Supernormal profits (P>ATC)
  • Long-run: New entrants → Supply increases → Price returns to min ATC

Critical Evaluation

Our textbook shows this through mobile industry examples. Critical analysis reveals perfect competition's self-correcting nature through free entry/exit.

Question 12:
A price-taking firm has TR = 500Q and TC = 200 + 300Q + 5Q². Determine its shutdown point and maximum profit output.
Answer:
Case Deconstruction

Shutdown occurs when P
Theoretical Application

  • AVC = (300Q + 5Q²)/Q = 300 + 5Q
  • MC = dTC/dQ = 300 + 10Q
  • MR = dTR/dQ = 500

Critical Evaluation

Setting MR=MC: 500=300+10Q → Q=20. Since P(500)>AVC(400 at Q=20), firm continues. This matches our practice problems on optimization.

Question 13:

Sunrise Agro Ltd. operates in a perfectly competitive market for wheat. The current market price is ₹50 per kg. The firm's total cost function is given by TC = 100 + 10Q + 0.5Q², where Q is output in kg. Based on this information:

  • Calculate the firm's profit-maximizing output level.
  • Determine whether the firm is earning supernormal profit, normal profit, or incurring a loss at this output.
Answer:

Step 1: Find the profit-maximizing output
In a perfectly competitive market, profit is maximized where Marginal Revenue (MR) = Marginal Cost (MC).
Given, Price (P) = ₹50 (since MR = P in perfect competition).
Total Cost (TC) = 100 + 10Q + 0.5Q²
MC = dTC/dQ = 10 + Q
Set MR = MC: 50 = 10 + Q → Q = 40 kg.

Step 2: Determine profit/loss
Total Revenue (TR) = P × Q = 50 × 40 = ₹2000
Total Cost (TC) = 100 + 10(40) + 0.5(40)² = 100 + 400 + 800 = ₹1300
Profit = TR - TC = ₹700
Since profit > 0, the firm is earning supernormal profit.

Additional Insight: In the long run, supernormal profits attract new firms, increasing supply and reducing market price until only normal profit is earned.

Question 14:

GreenTech Farms sells organic vegetables in a perfectly competitive market. The market price is ₹30 per kg. The firm's average variable cost (AVC) function is AVC = 20 + 0.1Q, and fixed costs are ₹500. Answer the following:

  • At what output level will the firm shut down in the short run?
  • Explain the shutdown point using this example.
Answer:

Step 1: Find the shutdown output
A firm shuts down if Price (P) < Minimum AVC.
AVC = 20 + 0.1Q
Minimum AVC occurs where dAVC/dQ = 0 → 0.1 = 0 → No minimum (linear AVC).
Thus, shutdown occurs when P < AVC at Q = 0 → ₹30 < ₹20 (False).
Since P > AVC for all Q, the firm never shuts down in the short run.

Step 2: Explain shutdown point
The shutdown point is where P = Minimum AVC. Here, since AVC is always ₹20 at Q = 0 and increases, the shutdown price is ₹20.
If market price falls below ₹20, GreenTech would shut down because it cannot cover even variable costs.

Key Concept: Fixed costs (₹500) are irrelevant for short-run shutdown decisions, as they are sunk costs.

Question 15:

Sunrise Agro Ltd. operates in a perfectly competitive market for wheat. The market price is ₹50 per kg. The firm's total cost function is given by TC = 100 + 10Q + Q², where Q is output in kg. Based on this information, answer the following:

  • Calculate the firm's profit-maximizing output level.
  • Determine whether the firm earns supernormal profit, normal profit, or incurs a loss at this output.
Answer:

Step 1: Find the profit-maximizing output
In a perfectly competitive market, profit is maximized where Marginal Cost (MC) = Market Price (P).
Given TC = 100 + 10Q + Q², MC = dTC/dQ = 10 + 2Q.
Set MC = P: 10 + 2Q = 50 → 2Q = 40 → Q = 20 kg.

Step 2: Determine profit/loss
Total Revenue (TR) = P × Q = 50 × 20 = ₹1000.
Total Cost (TC) = 100 + 10(20) + (20)² = 100 + 200 + 400 = ₹700.
Profit = TR - TC = 1000 - 700 = ₹300.
Since profit > 0, the firm earns supernormal profit.

Key Insight: Firms in perfect competition can earn supernormal profits in the short run due to fixed costs, but these are eliminated in the long run by new entrants.

Question 16:

GreenTech Farms sells organic vegetables in a perfectly competitive market. The current equilibrium price is ₹80 per unit. The firm's average variable cost (AVC) function is AVC = 20 + 0.5Q, and its fixed costs are ₹500. Answer the following:

  • At what output level will the firm shut down in the short run? Justify.
  • If the market price drops to ₹30, calculate the firm's short-run supply function.
Answer:

Step 1: Shut-down point
A firm shuts down if P < Minimum AVC.
AVC = 20 + 0.5Q. To find minimum AVC, set dAVC/dQ = 0 → 0.5 = 0 → No solution, so AVC increases linearly.
At Q = 0, AVC = ₹20. Thus, the firm shuts down if P < ₹20.

Step 2: Short-run supply function
Supply curve is the MC curve above AVC.
Given TC = FC + VC = 500 + (AVC × Q) = 500 + 20Q + 0.5Q².
MC = dTC/dQ = 20 + Q.
For P ≥ ₹20: Set P = MC → Q = P - 20.
Thus, supply function is Q = P - 20 for P ≥ ₹20, else Q = 0.

Application: Even at P = ₹30, the firm will produce Q = 30 - 20 = 10 units, covering variable costs but not fixed costs.

Question 17:
A farmer in a perfectly competitive market sells wheat at the prevailing market price. Due to a sudden increase in demand, the market price rises. Using appropriate diagrams, explain how this affects the farmer's total revenue and economic profit in the short run.
Answer:

In a perfectly competitive market, the farmer is a price taker, meaning they must sell wheat at the prevailing market price. When demand increases, the market equilibrium price rises from P1 to P2.

Impact on Total Revenue (TR):
TR = Price × Quantity Sold.
Since the price increases, TR will rise if the quantity sold remains the same or increases.

Impact on Economic Profit:
In the short run, the farmer's marginal cost (MC) curve intersects the new higher price (P2) at a higher output level, increasing profit.
Economic Profit = TR - Total Cost (TC).
Since TR increases and TC remains unchanged in the short run (fixed costs do not change), economic profit rises.

Diagram Explanation:
1. Draw the initial equilibrium with Price (P1) and Quantity (Q1).
2. Show the new demand curve shifting right, increasing price to P2.
3. The farmer's output increases to Q2 where MC = P2.
4. Shade the area representing increased economic profit (between P2 and the average total cost (ATC) curve).

Question 18:
A firm operating under perfect competition faces a situation where its average variable cost (AVC) exceeds the market price in the short run. Analyze whether the firm should continue production or shut down, using relevant cost concepts and diagrams.
Answer:

In the short run, a firm should compare the market price with its average variable cost (AVC) to decide whether to continue production or shut down.

Key Concepts:
1. Shutdown Point: Occurs when Price (P) < Minimum AVC.
2. Short-Run Supply Decision: If P > AVC, the firm should continue production to cover variable costs and contribute to fixed costs.
3. If P < AVC, the firm should shut down as it cannot even cover variable costs.

Analysis:
Since AVC > Market Price, the firm is incurring losses on every unit produced.
Continuing production would increase losses as fixed costs remain.
Shutting down minimizes losses to only fixed costs.

Diagram Explanation:
1. Draw the firm's cost curves (MC, AVC, ATC).
2. Mark the shutdown point where P = Minimum AVC.
3. If the market price is below the AVC curve, no output is supplied.
4. The firm's short-run supply curve is the MC curve above the AVC minimum.

Conclusion: The firm should shut down temporarily until prices recover or costs adjust.

Question 19:
A farmer in a perfectly competitive market sells wheat at ₹20 per kg. His total cost function is given by TC = 100 + 5Q + 0.1Q², where Q is output in kg.

(a) Calculate the profit-maximizing output level.
(b) Determine whether the farmer is earning supernormal profit, normal profit, or incurring a loss at this output level.
Answer:

To solve this case-based question, we will follow these steps:



(a) Profit-maximizing output level:

1. The profit-maximizing condition under perfect competition is MR = MC.
2. Given the price (P) is ₹20, MR = P = ₹20 (since firms are price takers).
3. Total Cost (TC) = 100 + 5Q + 0.1Q².
4. Marginal Cost (MC) = dTC/dQ = 5 + 0.2Q.
5. Set MR = MC: 20 = 5 + 0.2Q.
6. Solving for Q: 0.2Q = 15 → Q = 75 kg.

(b) Profit analysis:

1. Total Revenue (TR) = P × Q = 20 × 75 = ₹1500.
2. Total Cost (TC) = 100 + 5(75) + 0.1(75)² = 100 + 375 + 562.5 = ₹1037.5.
3. Profit = TR - TC = 1500 - 1037.5 = ₹462.5.
4. Since profit > 0, the farmer is earning supernormal profit.

Additional Insight: In the long run, supernormal profits attract new firms, increasing supply and reducing price until only normal profit is earned.

Question 20:
A firm operating in a perfectly competitive market has an average variable cost (AVC) function given by AVC = 10 - 2Q + 0.5Q². The market price is ₹8.

(a) Find the shutdown price for the firm.
(b) Should the firm continue production at the given market price? Justify your answer using calculations.
Answer:

This question tests understanding of the shutdown point in perfect competition. Here's the solution:



(a) Shutdown price:

1. The shutdown point occurs where Price = Minimum AVC.
2. AVC = 10 - 2Q + 0.5Q².
3. To find minimum AVC, take derivative and set to zero: dAVC/dQ = -2 + Q = 0 → Q = 2.
4. Substitute Q = 2 into AVC: AVC = 10 - 2(2) + 0.5(2)² = 10 - 4 + 2 = ₹8.
5. Thus, shutdown price = ₹8.

(b) Production decision:

1. At market price (P) = ₹8, compare with AVC:
- If P ≥ minimum AVC (₹8), continue production.
- If P < minimum AVC, shutdown.
2. Here, P = ₹8 = minimum AVC.
3. The firm is indifferent but typically continues production to cover variable costs.

Key Concept: The shutdown point is crucial for short-run decisions. Even at breakeven AVC, firms often operate to maintain market presence and cover some fixed costs indirectly.

Question 21:
A farmer in a perfectly competitive market sells wheat at ₹20 per kg. The market price suddenly rises to ₹25 per kg due to increased demand. Using the concept of perfect competition, analyze how this price change affects the farmer's short-run equilibrium and profit maximization.
Answer:

In a perfectly competitive market, the farmer is a price taker, meaning they cannot influence the market price. The rise in price from ₹20 to ₹25 per kg will impact the farmer's equilibrium and profits as follows:

  • Short-run equilibrium: The farmer will now produce at the output level where Marginal Cost (MC) equals the new market price (₹25). This will lead to an increase in the quantity supplied, as higher prices incentivize higher production.
  • Profit maximization: Since the price exceeds the Average Total Cost (ATC) at the new equilibrium, the farmer will earn supernormal profits in the short run. The profit is calculated as (Price - ATC) × Quantity.

However, in the long run, other farmers will enter the market due to these profits, increasing supply and eventually bringing the price back to the original equilibrium where only normal profits are earned.

Question 22:
A firm operating in a perfectly competitive market faces a Total Revenue (TR) curve represented by TR = 50Q, where Q is the quantity sold. The firm's Total Cost (TC) is given by TC = 10Q + 0.5Q². Determine the firm's profit-maximizing output level and calculate the economic profit earned at this level.
Answer:

To find the profit-maximizing output level, we follow these steps:


Step 1: Calculate Marginal Revenue (MR)
TR = 50Q
MR = d(TR)/dQ = 50

Step 2: Calculate Marginal Cost (MC)
TC = 10Q + 0.5Q²
MC = d(TC)/dQ = 10 + Q

Step 3: Set MR = MC for profit maximization
50 = 10 + Q
Q = 40 units

Step 4: Calculate Economic Profit
TR = 50 × 40 = ₹2000
TC = 10(40) + 0.5(40)² = 400 + 800 = ₹1200
Profit = TR - TC = ₹2000 - ₹1200 = ₹800

Thus, the firm maximizes profit at 40 units of output, earning an economic profit of ₹800. This profit is temporary in perfect competition, as new entrants will eventually drive profits down to zero in the long run.

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