NCERT Solution Economics Class 12 Chapter 4 The Theory of the firm Under Perfect Competition
NCERT Solution Economics Class 12 Chapter 4 The Theory of the firm Under Perfect Competition all questions and answers. Economics Class 12 4th Chapter The Theory of the firm Under Perfect Competition exercise solution and experts answer. As one of online learning platforms, we (netex.) are excited to offer the NCERT Solution Economics Class 12 Chapter 4. This solution is designed to help students who are looking to brush up on their physics concepts on Chapter 4 The Theory of the firm Under Perfect Competition.
1.) What are the characteristics of a perfectly competitive market?
The characteristics of a perfectly competitive market is as follows:
1.) The market consists of a large number of buyers and sellers
2.) Each firm produces and sells a homogenous product. i.e., the product of one firm cannot be differentiated from the product of any other firm.
3.) Entry into the market as well as exit from the market are free for firms.
4.) Information is perfect.
2.) How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
The total revenue of a firm , market price , and the quantity sold by the firm related to each other =Total revenue = Price * quantity sold.
3.) What is the ‘price line’?
The price line shows the relationship between the market price and a firm’s output level. Price line showing different values of firms output or two goods which a consumer can attain ,given his income and market price of the goods.
4.) Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why doesthe curve pass through the origin.
Ans -the total revenue changes as the quantity sold changes through a Total Revenue Curve. A total revenue curve plots the quantity sold or output on the X-axis and the Revenue earned on the Y-axis. Three observations are relevant here. First, when the output is zero, the total revenue of the firm is also zero. Therefore, the TR curve passes through point O that is origin. Second, the total revenue increases as the output goes up. Moreover, the equation ‘TR = p × q’ is that of a straight line because p is constant. This means that the TR curve is an upward rising straight line. Third, consider the slope of this straight line. When the output is one unit the total revenue is p × 1 = p. Therefore, the slope of the straight line is Aq1/Oq1 = p.
5.) What is the relation between market price and average revenue of a price taking firm?
Market price and average revenue of a price taking firm are equal.The price line shows the relationship between the market price and a firm’s output level.The total revenue curve of a firm shows the relationship between the total revenue that the firm earns and the output level of the firm. both are horizontal straight line .
6.) What is the relation between market price and marginal revenue of a price taking firm?
for a price-taking firm, marginal revenue equals the market price. The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. marginal revenue is equal to the market price per unit of output.
7.) What conditions must hold if a profit-maximising firm produces positive output in a competitivemarket?
The following conditions hold if a profit maximising firm produces positive output in a competitive market :1. The price, p, must equal MC 2. Marginal cost must be non-decreasing at q0 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC).
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.
Positive level of output that s profit maximizing firm produces in a competitive market at which market price is not equal to marginal cost its not possible.There cannot be any positive level of output that a firm produces at which price is not equal to Marginal cost .
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.
profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling it is not possible.marginal cost should be upward sloping or the slope of marginal cost should be positive at the equilibrium level of output.
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.
If a profit maximizing firm in a competitive market produce a positive level of output in the short run , then the market price must be greater than or equal of AVC at that output level.the market price is less than the minimum of AVC , the produces zero output.
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.
Profit maximizing 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 it is not possible . this is because , in the long run there is free Entry into the market as well as exit from the market are free for firms .
12.) What is the supply curve of a firm in the short run.
We shall split this derivation into two parts. We first determine a firm’s profit-maximising output level when the market price is greater than or equal to the minimum AVC. This done, we determine the firm’s profit-maximising output level when the market price is less than the minimum AVC. as the market price rises so firm will supply more product.
13.) What is the supply curve of a firm in the long run?
A firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all prices less than the minimum LRAC. The Long Run Supply Curve of a Firm. The long run supply curve of a firm, which is based on its long run marginal cost curve (LRMC) and long run average cost curve (LRAC).
14.) How does technological progress affect the supply curve of a firm?
Technological progress is expected to shift the supply curve of a firm to the right. , to produce a given level of output, the organisational innovation allows the firm to use fewer units of inputs. It is expected that this will lower the firm’s marginal cost at any level of output; that is, there is a rightward (or downward) shift of the MC curve. As the firm’s supply curve is essentially a segment of the MC curve, technological progress shifts the supply curve of the firm to the right. At any given market price, the firm now supplies more units of output.cost curve shifts downward.it means supply curve shifts forward .
15.) How does the imposition of a unit tax affect the supply curve of a firm?
The imposition of a unit tax shifts the supply curve of a firm to the left. increase in unit tax on the production of goods by the government , production will rise . A unit tax is a tax that the government imposes per unit sale of output. the long run marginal cost curve and the long run average cost curve of the firm.
16.) How does an increase in the price of an input affect the supply curve of a firm.
A change in input prices also affects a firm’s supply curve. If the price of an input (say, the wage rate of labour) increases, the cost of production rises. The consequent increase in the firm’s average cost at any level of output is usually accompanied by an increase in the firm’s marginal cost at any level of output; that is, there is a leftward (or upward) shift of the MC curve. This means that the firm’s supply curve shifts to the left: at any given market price, the firm now supplies fewer units of output.
17.) How does an increase in the number of firms in a market affect the market supply curve?
market supply curve has been derived for a fixed number of firms in the market. As the number of firms changes, the market supply curve shifts as well. Specifically, if the number of firms in the market increases (decreases), the market supply curve shifts to the right (left).it means the number of firms increases in the market , the market curve shifts to the right.
18.) What does the price elasticity of supply mean? How do we measure it?
The price elasticity of supply of a good is the percentage change in quantity supplied due to one per cent change in the market price of the good. The price elasticity of supply of a good measures the responsiveness of quantity supplied to changes in the price of the good.supply is completely insensitive to price and the elasticity of supply is zero. In other cases, when supply curve is positively sloped, with a rise in price, supply rises and hence, the elasticity of supply is positive. Like the price elasticity of demand, the price elasticity of supply is also independent of units.
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 |
ANS.
Quantity Sold | TR | MR | AR |
0 | 0 | 0 | – |
1 | 10 | 10 | 10 |
2 | 20 | 10 | 10 |
3 | 30 | 10 | 10 |
4 | 40 | 10 | 10 |
5 | 50 | 10 | 10 |
6 | 60 | 10 | 10 |
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 |
ANS.
Quantity Sold | TR(RS) | TC(RS) | PROFIT | AR=TR/Q |
0 | 0 | 5 | 0-5=-05 | – |
1 | 5 | 7 | 5-7=-2 | 5/1=5 |
2 | 10 | 10 | 10-10=0 | 10/2=5 |
3 | 15 | 12 | 15-12=3 | 15/3=5 |
4 | 20 | 15 | 20-15=-05 | 20/4=5 |
5 | 25 | 23 | 25-23=2 | 25/5=5 |
6 | 30 | 33 | 30-33=-03 | 30/6=5 |
7 | 35 | 40 | 35-40=-05 | 35/7=5 |
In case you are missed :- Previous Chapter Solution
21.) 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 level of output.
OUTPUT | TC(RS) |
0 | 5 |
1 | 15 |
2 | 22 |
3 | 27 |
4 | 31 |
5 | 38 |
6 | 49 |
7 | 63 |
8 | 81 |
9 | 101 |
10 | 123 |
ANS.
Quantity Sold | PRICE | TC(RS) | TR=P*Q | PROFIT=TR-TC |
0 | 10 | 5 | 10*0=0 | 0-5=-5 |
1 | 10 | 15 | 10*1=10 | 10-15=-05 |
2 | 10 | 22 | 10*2=20 | 20-22=02 |
3 | 10 | 27 | 10*3=30 | 30-27=3 |
4 | 10 | 31 | 10*4=40 | 40-31=9 |
5 | 10 | 38 | 10*5=50 | 50-38=12 |
6 | 10 | 49 | 10*6=60 | 60-49=11 |
7 | 10 | 63 | 10*7=70 | 70-63=7 |
8 | 10 | 81 | 10*8=80 | 80-81=-1 |
9 | 10 | 101 | 10*9=90 | 90-101=-11 |
10 | 10 | 123 | 10*10=100 | 100-123=-23 |
THE 5 UNITS OF OUTPUT , FIRM EARNING PROFIT RS.5
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 |
ANS.
PRICE | SS1 UNITS | SS2 UNITS | MARKET SUPPLY(SS1+SS2) |
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 |
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 | 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 |
5 | 3 | 1 |
6 | 4 | 1.5 |
7 | 5 | 2 |
8 | 6 | 2.5 |
ANS.MARKET SUPPLY CURVE
PRICE | SS1 | SS2 | MARKET SUPPLY=SS1+SS2 |
0 | 0 | 0 | 0+0=0 |
1 | 0 | 0 | 0+0=0 |
2 | 0 | 0 | 0+0=0 |
3 | 1 | 0 | 1+0=1 |
4 | 2 | 0.5 | 2+0.5=2.5 |
5 | 3 | 1 | 3+1=4 |
6 | 4 | 1.5 | 4+1.5=5.5 |
7 | 5 | 2 | 5+2=7 |
8 | 6 | 2.5 | 6+2.5=8.5 |
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 | SS1(UNITS) |
0 | 0 |
1 | 0 |
2 | 2 |
3 | 4 |
5 | 6 |
6 | 10 |
7 | 12 |
8 | 14 |
ANS.
PRICE | SS1(UNITS) | SS2 (UNITS) | SS3 (UNITS) | MARKET SUPPLY (SS1+SS2+SS3) |
0 | 0 | 0 | 0 | 0+0+0=0 |
1 | 0 | 0 | 0 | 0+0+0=0 |
2 | 2 | 2 | 2 | 2+2+2=6 |
3 | 4 | 4 | 4 | 4+4+4=12 |
4 | 6 | 6 | 6 | 6+6+6=18 |
5 | 8 | 8 | 8 | 8+8+8=24 |
6 | 10 | 10 | 10 | 10+10+10=30 |
7 | 12 | 12 | 12 | 12+12+12=36 |
8 | 14 | 14 | 14 | 14+14+14=42 |
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?
PRICE OF ELASTICITY OF SUPPLY ,Es= Percentage change in quantity supplied/ Percentage change in
Price
=∆Q/Q*100/∆P/P*100
=∆Q/Q*P/∆Q
PRICE(P)=10 RS ,TOTAL REVENUE (P*Q)=RS.50
QUANTITY Q=10/50
=5 UNITS
PRICE(P1)=15;TOTAL REVENUE (P1*Q1)=RS.150
QUANTITY SUPPLIED (Q1)=150/15=10units
P=RS.10 P1=RS.15
∆P=P1-P
15-10=5
Q=5UNITS Q1=10UNITS
PRICE ELASTICITY OF SUPPLY Es=P/Q*∆Q/∆P
= 10/5*5/5
= 2
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.
Elasticity supply Es=0.5
Price p1=RS.5
Final price p2=RS.20
∆P=P2-P1
= 20-5
∆P = 15
∆Q = 15
Es=∆Q/∆P*P1/Q1
0.5=15/15*5/Q1
0.5=5/Q1
Q1=5/0.5=10units
Q2=∆Q+Q1
= 15+10
= 25units
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?
P=RS10 P1=RS.30
∆P=P1-P = 30-10=20
Q=4 units Q1=X units
∆Q=Q1-Q =(X-4)
Es=1.25
Es=P/Q*(X-4)/20
1.25=10/4*(X-4)/20
1.25=(X-4)/8
X-4=10
X=10+4
X=14 units.
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