Hello Students. Are you Searching for NCERT Solutions for Class 12 Economics Chapter 4? If yes then you are most welcome to NCERTian. Here we have provided you with the complete Question and Answers of Chapter 4: The Theory of the Firm under Perfect Competition, from Micro Economics textbook. These solutions are written by expert teachers and faculties keeping the need of students in mind.
| Chapter | 4. The Theory of the Firm under Perfect Competition |
| Subject | Economics |
| Textbook | Micro Economics |
| Class | Twelve |
| Category | NCERT Solutions for Class 12 |
The NCERT Solutions for Class 12 Economics cover all the questions pertaining to the subject in a very clear and lucid manner. Apart from being highly accurate, these solutions are also very easy to memorize. These solutions are written as per the latest CBSE syllabus and are helpful in clearing doubts. On this solution page, we have provided you with complete overview of the concepts and methods covered in the Chapter 4 of Micro Economics – The Theory of the Firm under Perfect Competition.
NCERT Solutions for Class 12 Economics Chapter 4
The Theory of the Firm under Perfect Competition Solutions
Q1) What are the characteristics of a perfectly competitive market?
Answer) A perfectly competitive market exhibits the following characteristics:
- There are many sellers and buyers in every category.
- Multiple choices for similar products.
- Sellers or buyers are well-informed and are free to make decisions based on their knowledge of the market.
- All the products are homogeneous. Because every product has the same properties, a uniform price can be achieved.
- There is no extra cost due to marketing or advertising.
Q2) How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
Answer) Total revenue is said to be defined as the total sales proceeds of a producer by selling corresponding levels of output or sum total of revenue receipts from the sale of a given quantity of commodity. In other words, it can be defined as price times the quantity of output sold.
Total Revenue = Market Price x Quantity of output sold
In a perfectly competitive market, the marketplace price is given, i.e., a company can act as a price taker and cannot have an effect on the rate. subsequently, a specific firm can have an impact on its TR by altering the amount.
Q3) What is the ‘price line’?
Answer) A price line or a budget line represents the various combinations and possible quantities of two goods that can be purchased with a given income and assumed prices.
Q4) 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) 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 also 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.
Q5) What is the relation between market price and average revenue of a price-taking firm?
Average revenue is described as the sales consistent with unit of the output sold. it is expressed because the ratio among general sales and the output bought.
AR= TR/O
We know that,
TR= P * Q
AR=P * Q \ Q
AR = P
For this reason, the marketplace fee and the common sales are the equal for an excellent competitive firm.
Q6) What is the relation between market price and marginal revenue of a price-taking firm?
Marginal revenue is defined as the change in the total revenue that occurs due to the sale of one more unit of output. It is calculated as
MRn = TRn − TRn − 1
Where
MRn = Marginal revenue due to nth unit of output
TRn = Total revenue due to n units of output
TRn − 1 = Total revenue due to (n − 1) units of output
Suppose that the market price is P
MRn = TRn − TRn − 1
= PQn − P (Qn − 1)
MR = PQn − PQn+ P
MR = P
Thus, for a perfect competitive firm, marginal revenue is equal to the market price per unit of output.
Q7) What conditions must hold if a profit-maximising firm produces positive output in a competitive market?
Answer) The following conditions must be satisfied:
- Marginal cost should be equal to that of marginal revenue. In other words MC=MR at equilibrium output.
- Marginal cost should rise above the marginal revenue after exceeding equilibrium output level.
- The price should be greater than or equal to average variable cost at equilibrium output level (AVC) in short run
- The price should be greater than or equal to average cost at equilibrium output level in long run.
Q8) 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 the marginal cost? Give an explanation
Answer) There is no positive level of output that a firm generates at which price is not equal to MC. Let us understand the following two cases where price is not equal to MC.
- Case A: If P > MC: At output Oq1, price is, while the MC is Lq1. So, Oq1 isn’t the income maximizing output. that is because of the truth that the firm can grow its profit degree via increasing its output too.
- Case B: If P < MC: At output Oq3 price is Hq3 and MC is Gq3. So, Oq3 isn’t always the income maximizing output. That is due to the fact the firm can growth its income through lowering its output degree to. Hence the earnings maximizing factor must be same as MC and it can not be extra or lesser than MC.
Q9) 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) 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.
Q10) 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?
Answer) A firm which has its objective of profit maximising under the condition of market price being less than the minimum AVC (average variable cost) will be unable to produce a level of output in the short run because when market price falls to the level of minimum AVC, it indicates that further production cannot be continued and in such a condition a firm is unable to operate.
Q11) 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) No, for a profit maximising firm which is operating in a competitive market, producing a positive level of output in the long run with the condition of market price less than AC (Average Cost) is not possible, due to the reason that in the long run there will be free entry and exit of firms and all firms will be earning normal profit. Therefore, a firm will be making losses if market price falls below average cost and in this condition the firm need to stop production.
Q12) What is the supply curve of a firm in the short run?
Answer) A firm which is perfectly competitive will have a supply curve that is the summation of the upward sloping part of the short run marginal cost (SMC) when the minimum average variable cost is more than or equal to it and the vertical part of the price axis in a situation where price is less than the minimum average variable cost (AVC).
Q13) What is the supply curve of a firm in the long run?
Answer) In long run there will be no fixed costs as the supply can be changed by changing all the factors of production. Therefore, in a perfectly competitive firm the supply curve will be the summation of upward sloping part of marginal cost that is above the minimum point of average cost in a condition when price is more than or equal to minimum average cost and the vertical portion of price axis in a situation where the price is less than the minimum of average cost. In other words it is that portion of marginal cost curve that lies above the minimum point of average cost curve.
Q14) How does technological progress affect the supply curve of a firm?
Answer) The supply curve of a company is a wonderful feature of a country of era. that is, if the technology to be had to the firm appreciates, more amount of output may be produced through the firm with the given ranges of capital and exertions. due to such improvements or technological improvements, the company will revel in decrease cost of manufacturing, that allows you to result in downward shift (to the right) of the MC curve. this may similarly cause rightward shift of the firm’s supply curve. accordingly, because of the appreciation and development of production strategies, the company will produce more and more output a good way to be provided at a given marketplace fee. it may reason fall to the marginal price additionally.
Q15) How does the imposition of a unit tax affect the supply curve of a firm?
Answer) Unit tax is imposed on per unit of the output which is sold. The impact of 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.
Q16) How does an increase in the price of an input affect the supply curve of a firm?
Answer) A boom inside the price of an enter increases the cost of manufacturing, which in turn increases the marginal fee of the company. consequently, the MC curve will shift upward to the left. As a result, the supply curve will even shift leftward upward. therefore, an increase in the enter rate negatively impacts the deliver of the company.
Q17) How does an increase in the number of firms in a market affect the market supply curve?
Answer) The marketplace deliver curve is a horizontal summation of all the supply curves of man or woman companies in the market. If the wide variety of firms in a market will increase, then the marketplace deliver curve will shift rightward as there might be greater variety of firms imparting extra output. boom in variety of producers will reason increase in deliver.
Q18) What does the price elasticity of supply mean? How do we measure it?
Answer) Price elasticity of supply (es) or PES is defined as the degree of the responsiveness of quantity supplied, to the change in price for a specific commodity.
It is only expressed in numerical form as:
Price elasticity of supply (es)
Es = Percentage change in quantity supplied / Percentage change in price.
Q19) Calculate the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.
Answer) As per the question, P= 10
Q20) 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)
Q21) The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is Rs 10. Calculate the profit at each output level. Find the profit maximising the 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)
Profit maximization occurs when the difference between revenue and cost is maximum, in the above table it is occurring in 5 units of output and the profit earned is Rs.12
Q22)
Consider a market with two firms. The following table shows supply schedules of two firms: SS1 denotes the supply schedule of firm 1 and SS2 denotes the supply schedule of firm 2. Calculate 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)
Q23) 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)
Q24) There are three identical firms in a market. The following table shows the supply schedule of firm 1. Calculate 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) As per question, when the three firms are identical, all of them will be having the same supply curve. Market supply will be the sum of all three firms supply output
Q25) A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increase 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)
Q26) 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)
Q27) 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)
That’s it. These were the solutions of NCERT Class 12 Economics Chapter 3 – Production and Costs. Our team hopes that you have found these solutions helpful for you. If you have any doubt related to this chapter then feel free to comment your doubts below. Our team will try their best to help you with your doubts.