CUET UG Booster Economics 4 Test (D3) -

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CUET UG Booster Economics 4 Test (D3)

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Booster Economics 4 Test (D3)

1 / 20

QUESTION 1 OF 20

Assertion (A): The exact amount a firm produces and sells is determined by the objective of maximising the gap between TR and TC.
Reason (R): Profit is defined as TR - TC, and the firm acts primarily as a ruthless profit maximiser.

Answer Review

1 Assertion (A): The exact amount a firm produces and sells is determined by the objective of maximising the gap between TR and TC.
Reason (R): Profit is defined as TR - TC, and the firm acts primarily as a ruthless profit maximiser.

A Both true, R explains A

B A true, R false

C Both false

D A false, R true

💡 Short Explanation

Profit equals Total Revenue minus Total Cost. Firms under perfect competition aim to maximise profit. Therefore, they choose the output where the difference between TR and TC is the greatest.

✅ Correct Answer Explanation

The Assertion is true because a firm's production decision is based on choosing the output level that gives the maximum difference between Total Revenue (TR) and Total Cost (TC). The Reason is also true because: Profit = Total Revenue - Total Cost NCERT assumes that a perfectly competitive firm is a profit maximiser. Since profit is the difference between TR and TC, the firm selects the output level where this difference is highest. Thus, the Reason correctly explains why the firm chooses a particular output level. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → A true, R false

The Reason correctly defines profit and explains the Assertion.

Option C → Both false

Both the Assertion and Reason are true according to NCERT.

Option D → A false, R true

The Assertion is also true.

🎯 Strategy

Used

Elimination

Application:

Check the truth of both statements separately and then determine whether the Reason explains the Assertion.

Final Logic:

Since profit equals TR - TC and firms maximise profit, both statements are true and logically connected.

🧠 Memory Trick

Maximum TR - TC = Maximum Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Profit Maximisation Objective

2 At output q0, a firm's TR is determined by the area of rectangle OpAq0, and its TC is the area of rectangle OEBq0. If height Op = 10, width Oq0 = 50, and height OE = 8, what is the exact profit?

A 500

B 400

C 50

D 100

💡 Short Explanation

Total Revenue = Price x Quantity. Total Cost = Average Cost x Quantity. Profit = Total Revenue - Total Cost.

✅ Correct Answer Explanation

Step 1: Total Revenue = Height x Width = 10 x 50 = 500 Step 2: Total Cost = 8 x 50 = 400 Step 3: Profit = Total Revenue - Total Cost = 500 - 400 = 100 Therefore, Option D is correct. Why the remaining options are incorrect: Option A represents Total Revenue only. Option B represents Total Cost only. Option C is obtained through incorrect calculation.

❓ Why Other Options Are Incorrect

Option A → 500

This is the Total Revenue, not profit.

Option B → 400

This is the Total Cost.

Option C → 50

Profit is not calculated correctly.

🎯 Strategy

Used

Substitution

Application:

Substitute the numerical values into the formulas for Total Revenue and Total Cost.

Final Logic:

500 - 400 = 100.

🧠 Memory Trick

TR - TC = Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Profit Calculation Using TR and TC

3 Which combinations accurately describe the mandatory conditions for identifying the profit-maximising quantity q0?
1. P = MC
2. MC is non-decreasing
3. P < AVC in short run
4. P >= AC in long run

A 1, 2, and 4

B 1, 3, and 4

C 2 and 3 only

D 1 and 3 only

💡 Short Explanation

Profit maximisation requires Price = MC. MC must be rising or non-decreasing. In the long run, firms continue only if Price >= AC.

✅ Correct Answer Explanation

The correct conditions are: Statement 1: P = MC – Correct. For a perfectly competitive firm, MR = Price, and profit is maximised where MR = MC. Statement 2: MC is non-decreasing – Correct. The MC curve must be rising at equilibrium to satisfy the second condition for profit maximisation. Statement 3: P < AVC in short run – Incorrect. If Price is below AVC, the firm shuts down. The correct condition is Price >= AVC. Statement 4: P >= AC in long run – Correct. A firm remains in the industry only if it can cover all costs in the long run. Hence, the correct combination is 1, 2 and 4. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → 1, 3, and 4

Statement 3 is incorrect because Price below AVC leads to shutdown.

Option C → 2 and 3 only

It excludes the essential condition P = MC.

Option D → 1 and 3 only

Statement 3 is incorrect, and Statement 2 is missing.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement individually before identifying the correct combination.

Final Logic:

Statements 1, 2 and 4 satisfy NCERT's profit-maximisation conditions.

🧠 Memory Trick

P = MC + Rising MC + P >= AC

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Conditions for Profit Maximisation

4 If a competitive firm is producing at an output level where all three profit-maximising conditions are strictly met, any deviation from this output will result in:

A A reduction in total profit

B An increase in total cost with proportional revenue increase

C An immediate shutdown

D A transition from normal to super-normal profit

💡 Short Explanation

Profit-maximising output gives the highest possible profit. Any increase or decrease in output from this level lowers profit. Therefore, deviation from the equilibrium output reduces total profit.

✅ Correct Answer Explanation

A profit-maximising firm under perfect competition chooses the output where all the following conditions are satisfied: Price = Marginal Cost (P = MC) Marginal Cost is rising (non-decreasing) Price >= Average Variable Cost (short run) or Price >= Average Cost (long run) At this output level, profit is at its maximum. If the firm either increases or decreases output from this equilibrium level: Marginal Cost and Marginal Revenue are no longer balanced. The difference between Total Revenue and Total Cost becomes smaller. Total profit declines. Therefore, Option A is correct. Why the remaining options are incorrect: Option B is incorrect because revenue need not increase proportionally with cost after leaving equilibrium. Option C is incorrect because deviation from equilibrium does not automatically imply shutdown. Option D is incorrect because changing output alone does not necessarily convert normal profit into super-normal profit.

❓ Why Other Options Are Incorrect

Option B → An increase in total cost with proportional revenue increase

Revenue and cost do not necessarily increase proportionally after equilibrium.

Option C → An immediate shutdown

Shutdown occurs only if Price falls below Average Variable Cost in the short run.

Option D → A transition from normal to super-normal profit

Profit type depends on market conditions, not merely on changing output.

🎯 Strategy

Used

Conceptual Elimination

Application:

Recall that equilibrium output gives maximum profit. Any movement away from it must reduce profit.

Final Logic:

Maximum profit occurs only at the equilibrium output; any deviation lowers profit.

🧠 Memory Trick

Leave q0 = Lose Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Profit-Maximising Output

5 The mathematical intuition behind the vital condition MR = MC is based on the fact that:

A Total revenue is a flat horizontal line

B As long as the revenue added by an extra unit exceeds its cost, profit increases

C Marginal cost must always be zero at equilibrium

D Average variable cost is equal to marginal revenue

💡 Short Explanation

Marginal Revenue is the additional revenue from one more unit. Marginal Cost is the additional cost of producing one more unit. Profit increases as long as Marginal Revenue exceeds Marginal Cost.

✅ Correct Answer Explanation

The first condition for profit maximisation is based on comparing: Marginal Revenue (MR): Extra revenue earned from selling one additional unit. Marginal Cost (MC): Extra cost incurred in producing one additional unit. If: MR > MC the additional unit contributes more to revenue than to cost, so profit increases. The firm should continue producing until: MR = MC At this point, maximum profit is achieved because producing one more unit would no longer increase profit. Therefore, Option B is correct. Why the remaining options are incorrect: Option A is incorrect because Total Revenue is not a horizontal line; it rises with output under perfect competition. Option C is incorrect because Marginal Cost is not zero at equilibrium. Option D is incorrect because Average Variable Cost and Marginal Revenue are different concepts and are generally not equal.

❓ Why Other Options Are Incorrect

Option A → Total revenue is a flat horizontal line

Total Revenue increases as output increases.

Option C → Marginal cost must always be zero at equilibrium

Equilibrium requires MR = MC, not MC = 0.

Option D → Average variable cost is equal to marginal revenue

AVC and MR measure different economic concepts.

🎯 Strategy

Used

Conceptual Elimination

Application:

Compare the meaning of Marginal Revenue and Marginal Cost to identify the correct profit-maximisation principle.

Final Logic:

Profit continues to rise while MR exceeds MC and reaches its maximum when MR equals MC.

🧠 Memory Trick

MR > MC = More Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: First Condition for Profit Maximisation (MR = MC)

6 Match the economic variables to establish why P = MC at profit maximisation:

List I	List II
1. Price-taking firm's MR	a. Equals Market Price
2. Profit-maximising rule	b. MR = MC
3. Consequently derived condition	c. P = MC
4. Extra unit sold revenue	d. Market Price (P)

A 1-b, 2-c, 3-a, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-d, 2-a, 3-b, 4-c

D 1-c, 2-b, 3-d, 4-a

💡 Short Explanation

Under perfect competition, MR equals Market Price. Profit is maximised where MR = MC. Therefore, P = MC.

✅ Correct Answer Explanation

The correct matching is: 1 → a : A price-taking firm's Marginal Revenue equals the Market Price. 2 → b : Profit maximisation requires MR = MC. 3 → c : Since MR = P, the condition becomes P = MC. 4 → d : Revenue from one additional unit equals the Market Price. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A
Incorrectly matches MR with MR = MC.
Option C
Incorrectly matches the profit-maximising rule.
Option D
Incorrectly matches the derived condition.

🎯 Strategy

Used

Option Grouping

Application:

Match the known economic identities first (MR = Market Price and MR = MC), then derive P = MC.

Final Logic:

MR = P and MR = MC together imply P = MC.

🧠 Memory Trick

MR = P → MR = MC → P = MC

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Profit Maximisation (P = MC)

7 Arrange the logical sequence to prove that an output where MR > MC is NOT optimal:
1. Current output is q1, where MR > MC.
2. Firm decides to increase output by 1 unit.
3. The added unit brings more revenue than its cost.
4. Total profit rises, proving q1 was not the maximum.

A 1, 2, 3, 4

B 4, 3, 2, 1

C 2, 1, 3, 4

D 1, 3, 2, 4

💡 Short Explanation

First, MR > MC is observed. The additional unit is expected to add more revenue than cost. The firm therefore increases output. Profit rises, proving the earlier output was not optimal.

✅ Correct Answer Explanation

The logical order is: 1 → The firm observes that MR > MC at q1. 3 → This means one more unit will add more revenue than cost. 2 → Therefore, the firm decides to increase output. 4 → Profit increases, proving q1 was not the profit-maximising output. Hence, Option D is the most logically consistent answer. Option A places the firm's decision before establishing why that decision is profitable.

❓ Why Other Options Are Incorrect

Option A
The decision to increase output should logically follow the realization that the extra unit earns more than it costs.
Option B
Starts with the final conclusion.
Option C
Begins with the firm's decision before identifying the economic condition.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the statements according to economic reasoning and decision-making.

Final Logic:

Observation → Economic Reason → Decision → Result.

🧠 Memory Trick

Observe → Reason → Produce → Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Logic of MR > MC

8 If q6 is an output level where marginal cost exceeds market price, why can't q6 be the profit-maximising output?

A Because total fixed costs would be negative.

B Because reducing output slightly would save more cost than the revenue lost, thus increasing profit.

C Because the firm would be making super-normal profits.

D Because market price is determined by the firm.

💡 Short Explanation

Here, MC > Price (MR). Producing the last unit reduces profit. Reducing output increases profit.

✅ Correct Answer Explanation

Under perfect competition: Price = MR. If: MC > Price, then: MC > MR. The last unit costs more to produce than the revenue it generates. Reducing output saves more cost than the revenue sacrificed, thereby increasing profit. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Because total fixed costs would be negative.

Fixed costs cannot be negative.

Option C → Because the firm would be making super-normal profits.

MC > MR does not indicate super-normal profit.

Option D → Because market price is determined by the firm.

A perfectly competitive firm is a price taker.

🎯 Strategy

Used

Conceptual Elimination

Application:

Compare the additional revenue with the additional cost.

Final Logic:

MC > MR means reduce output.

🧠 Memory Trick

MC > MR = Cut Output

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Logic of MR < MC

9 At an output level q1 where P = MC, but the MC curve is downward sloping, an output level slightly smaller than q1 will mathematically yield:

A Exactly zero profit

B Lower profit than at q1

C Negative total revenue

D Greater profit than at q1

💡 Short Explanation

Profit maximisation requires a rising MC curve. A downward-sloping MC violates the second condition. A slightly smaller output gives higher profit.

✅ Correct Answer Explanation

Although Price = MC at q1, the MC curve is falling. This violates the second condition for profit maximisation. When MC is downward sloping, moving to a slightly smaller output increases profit, proving q1 is not the true equilibrium. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Exactly zero profit

Profit need not be zero.

Option B → Lower profit than at q1

The opposite is true.

Option C → Negative total revenue

Revenue remains positive.

🎯 Strategy

Used

Conceptual Elimination

Application:

Apply the second-order condition for profit maximisation.

Final Logic:

Falling MC means equilibrium is unstable.

🧠 Memory Trick

Rising MC = Maximum Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Second Condition of Profit Maximisation

10 The structural requirement of a rising MC curve ensures that the firm is intersecting the perfectly elastic price line from:

A Above

B The y-axis

C Below

D The origin

💡 Short Explanation

The price line is horizontal. The MC curve must be rising at equilibrium. Therefore, the MC curve cuts the price line from below.

✅ Correct Answer Explanation

The price line under perfect competition is horizontal because Price = MR. At equilibrium: Price = MC. The MC curve must be rising. A rising MC curve intersects the horizontal price line from below, satisfying the second-order condition for profit maximisation. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Above

A downward intersection violates the rising MC condition.

Option B → The y-axis

The y-axis has no role in this condition.

Option D → The origin

The origin is unrelated to the equilibrium intersection.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Visualise the standard NCERT graph showing the horizontal price line and rising MC curve.

Final Logic:

The rising MC curve intersects the price line from below.

🧠 Memory Trick

MC Rises Up to Price

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Rising MC Curve and Equilibrium

📄 Passage

"Recall that the firm's profit at q1 is TR – (TVC + TFC). What happens if the firm produces zero output? Since output is zero, TR and TVC are zero as well. Hence, the firm's profit at zero output is equal to – TFC."

According to the passage, the firm will choose to produce zero output if the calculated profit at q1 is:

A Exactly zero

B Strictly less than -TFC

C Equal to -TVC

D Greater than normal profit

💡 Short Explanation

Profit at zero output equals -TFC. If producing results in a loss greater than TFC, shutting down is better. Therefore, the firm produces zero output.

✅ Correct Answer Explanation

According to the passage: If the firm produces zero output: Total Revenue (TR) = 0 Total Variable Cost (TVC) = 0 Profit = -TFC A firm compares this shutdown loss with the loss from producing. If the profit from producing q1 is less than -TFC (that is, the loss is even greater than Total Fixed Cost), shutting down minimises the loss. Therefore, Option B is correct. Why the remaining options are incorrect: Option A is incorrect because zero profit does not justify shutdown. Option C is incorrect because shutdown loss is measured by TFC, not TVC. Option D is incorrect because the firm is making a loss, not earning profit.

❓ Why Other Options Are Incorrect

Option A → Exactly zero

Zero profit is not the shutdown condition.

Option C → Equal to -TVC

Variable costs disappear after shutdown.

Option D → Greater than normal profit

Shutdown occurs because of losses, not profits.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the passage and compare production loss with shutdown loss.

Final Logic:

Produce only if loss is less than or equal to TFC.

🧠 Memory Trick

Loss > TFC → Shut Down

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Short-Run Shutdown Condition

📄 Passage

Based strictly on the passage, the total revenue (TR) at zero output evaluates to:

A Zero

B Negative

C Equal to TFC

D Equal to normal profit

💡 Short Explanation

Zero output means nothing is sold. Therefore, Total Revenue equals zero. This is directly stated in the passage.

✅ Correct Answer Explanation

The passage clearly states: "When output is zero, TR and TVC are zero." Since no goods are produced or sold: Quantity = 0 Total Revenue = Price × Quantity = 0 Therefore, Option A is correct. Why the remaining options are incorrect: Option B is incorrect because Total Revenue cannot be negative. Option C confuses revenue with fixed cost. Option D is unrelated to Total Revenue.

❓ Why Other Options Are Incorrect

Option B → Negative

Revenue cannot be negative.

Option C → Equal to TFC

Fixed Cost and Revenue are different concepts.

Option D → Equal to normal profit

Revenue is not equal to profit.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Read the passage carefully and identify the direct statement.

Final Logic:

Zero output always means zero revenue.

🧠 Memory Trick

No Output = No Revenue

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Shutdown Decision

13 Assertion (A): In the long run, a firm will not produce at an output where price is lower than AC.
Reason (R): In the long run, shutting down results in zero profit, which is economically better than a negative profit (loss).

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

Firms must cover all costs in the long run. If Price is below AC, the firm exits. Exiting gives zero profit, which is better than continuing with losses.

✅ Correct Answer Explanation

The Assertion is true because: A firm can remain in the market only if: Price >= Average Cost If Price falls below AC, the firm cannot recover all costs and exits. The Reason is also true because: After exiting: Revenue = 0 Cost = 0 Profit = 0 Zero profit is preferable to continuing production with losses. Therefore, the Reason correctly explains the Assertion. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Both false

Both statements are true.

Option B → A true, R false

The Reason is also correct.

Option D → A false, R true

The Assertion is true.

🎯 Strategy

Used

Elimination

Application:

Check the truth of both statements separately before testing the explanation.

Final Logic:

Both statements are correct and logically connected.

🧠 Memory Trick

P < AC = Exit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Long-Run Exit Condition

14 In the long run, a firm faces a Market Price of Rs 15. Its Long Run Average Cost (LRAC) at the profit-maximising output is Rs 18. What is the firm's rational decision and its resultant long-run profit?

A Continue producing, Profit = -Rs 3 per unit

B Shut down, Profit = -Rs 3 per unit

C Continue producing, Profit = Rs 0

D Exit the market, Profit = Rs 0

💡 Short Explanation

Price is below LRAC. The firm cannot recover total costs. The rational decision is to exit.

✅ Correct Answer Explanation

Given: Market Price = Rs 15 LRAC = Rs 18 Since: Price < LRAC the firm cannot cover all costs. In the long run, all costs are avoidable. Therefore, the firm exits the industry. After exit: Revenue = 0 Cost = 0 Profit = 0 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Continue producing, Profit = -Rs 3 per unit

Continuing would increase losses.

Option B → Shut down, Profit = -Rs 3 per unit

Long-run exit results in zero profit, not a loss.

Option C → Continue producing, Profit = Rs 0

Continuing production with Price below LRAC cannot produce zero profit.

🎯 Strategy

Used

Substitution

Application:

Compare Market Price directly with LRAC.

Final Logic:

Price below LRAC means the firm exits.

🧠 Memory Trick

Price < LRAC = Exit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Long-Run Exit Decision

15 The definitive "shut down point" in the short run corresponds geometrically to the absolute lowest point of the:

A Average Variable Cost (AVC) curve

B Long Run Average Cost (LRAC) curve

C Average Fixed Cost (AFC) curve

D Marginal Revenue (MR) curve

💡 Short Explanation

The shutdown point occurs at the minimum AVC. Below this point, production should stop. It is a short-run concept.

✅ Correct Answer Explanation

The shutdown point is where: Price = Minimum AVC If Price falls below this level: Variable costs cannot be recovered. Continuing production increases losses. The firm shuts down. Therefore, the lowest point of the AVC curve is called the shutdown point. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Long Run Average Cost (LRAC) curve

LRAC determines long-run exit, not shutdown.

Option C → Average Fixed Cost (AFC) curve

AFC is not used to determine shutdown.

Option D → Marginal Revenue (MR) curve

MR determines equilibrium, not the shutdown point.

🎯 Strategy

Used

Odd One Out

Application:

Identify the curve specifically associated with the short-run shutdown decision.

Final Logic:

Only the AVC curve determines the shutdown point.

🧠 Memory Trick

Minimum AVC = Shut Down Point

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Short-Run Shutdown Point

16 Match the graphical representation of Profit/Loss structures:

List I	List II
1. TR area	a. Rectangle OEBq1 (E = LRAC)
2. TVC area	b. Rectangle OpAq1
3. TC area in Long Run	c. Rectangle OEBq1 (E = AVC)
4. Loss area if P < AC	d. Area of OEBq1 minus OpAq1

A 1-b, 2-c, 3-a, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-c, 2-a, 3-d, 4-b

D 1-d, 2-c, 3-b, 4-a

💡 Short Explanation

Total Revenue = Price × Quantity rectangle. TVC = AVC × Quantity rectangle. Long-run Total Cost = LRAC × Quantity rectangle. Loss equals Total Cost minus Total Revenue.

✅ Correct Answer Explanation

The correct matching is: 1 → b : Total Revenue is represented by the rectangle OpAq1 (Price × Quantity). 2 → c : Total Variable Cost is represented by the rectangle based on AVC × Quantity. 3 → a : Long-run Total Cost is represented by the rectangle based on LRAC × Quantity. 4 → d : Loss occurs when Total Cost exceeds Total Revenue and is shown by Area OEBq1 − OpAq1. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B
Incorrectly exchanges Total Revenue and Long-run Total Cost.
Option C
Incorrectly matches Total Revenue with AVC.
Option D
Incorrectly matches the Total Revenue rectangle.

🎯 Strategy

Used

Option Grouping

Application:

First identify the standard rectangles for Revenue and Costs, then match the remaining loss area.

Final Logic:

Revenue = Price × Quantity, TVC = AVC × Quantity, TC = LRAC × Quantity.

🧠 Memory Trick

PQ = Revenue, AVCQ = TVC, ACQ = TC

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Graphical Representation of Revenue, Cost and Loss

17 Arrange the rigorous steps a firm takes to determine its short-run equilibrium output:
1. Check if Price >= minimum AVC to avoid shutdown.
2. Find the output where Price = SMC.
3. Confirm SMC is upward sloping.
4. Produce q0 and earn corresponding profit.

A 1, 2, 3, 4

B 4, 3, 2, 1

C 2, 3, 1, 4

D 3, 1, 4, 2

💡 Short Explanation

First identify where Price = SMC. Then verify that the SMC curve is rising. Ensure the shutdown condition is satisfied. Finally, produce the equilibrium output.

✅ Correct Answer Explanation

The correct sequence is: 2 → Locate the output where Price = SMC (first-order condition). 3 → Confirm that the SMC curve is rising, satisfying the second condition. 1 → Check that Price >= minimum AVC, ensuring the firm should continue production. 4 → Produce q0 and earn the corresponding profit. Thus, Option C is correct. The sequence follows the logical decision-making process described in NCERT.

❓ Why Other Options Are Incorrect

Option A
The shutdown condition is checked only after identifying the equilibrium output.
Option B
Begins with production before determining equilibrium.
Option D
Confirms the second condition before locating the equilibrium point.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the firm's decisions in the same order used in the NCERT analysis of profit maximisation.

Final Logic:

Find equilibrium → Verify rising MC → Check shutdown condition → Produce.

🧠 Memory Trick

Find → Verify → Check → Produce

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Short-Run Equilibrium of the Firm

18 Which of the following accurately describes the geometric 'Profit Area' rectangle EpAB at optimal output q0?

A It perfectly equals Total Fixed Cost.

B Its vertical height is exactly the Market Price.

C Its base is the Total Revenue.

D Its vertical height is the difference between Market Price and Average Cost.

💡 Short Explanation

Profit equals (Price − Average Cost) × Quantity. The rectangle's height is Price − Average Cost. The rectangle's base is the equilibrium output.

✅ Correct Answer Explanation

On the NCERT graph: Profit Area = (Market Price − Average Cost) × Output. Therefore: Height = Market Price − Average Cost. Base = Quantity produced (q0). This rectangle represents total profit. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → It perfectly equals Total Fixed Cost.

Profit is different from Total Fixed Cost.

Option B → Its vertical height is exactly the Market Price.

The height represents Price minus Average Cost, not Price alone.

Option C → Its base is the Total Revenue.

The base is output (quantity), not revenue.

🎯 Strategy

Used

Dimensional/Unit Analysis

Application:

Recognise that rectangle height represents a per-unit value, while the base represents output.

Final Logic:

Profit per unit = Price − Average Cost.

🧠 Memory Trick

Profit Height = P − AC

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Graphical Representation of Profit

19 In economic terms, normal profit is considered part of the firm's total costs because it represents:

A The opportunity cost for entrepreneurship

B The accounting profit explicitly paid

C The sunk cost of entering the market

D The fixed cost of machinery

💡 Short Explanation

Normal profit is an implicit cost. It represents the entrepreneur's opportunity cost. Therefore, it is included in Total Cost.

✅ Correct Answer Explanation

According to NCERT, Normal Profit is the minimum return required by the entrepreneur to remain in the current business. It is treated as an implicit cost because it represents the income the entrepreneur sacrifices by not choosing the next best alternative. Hence, normal profit forms part of Total Cost. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → The accounting profit explicitly paid

Normal profit is an implicit, not explicit, cost.

Option C → The sunk cost of entering the market

Sunk costs cannot be recovered and are unrelated to normal profit.

Option D → The fixed cost of machinery

Machinery costs are production costs, not opportunity costs.

🎯 Strategy

Used

Odd One Out

Application:

Identify the option that correctly defines normal profit in economics.

Final Logic:

Normal profit represents the entrepreneur's opportunity cost.

🧠 Memory Trick

Normal Profit = Opportunity Cost

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Normal Profit

20 The Break-Even Point of a firm occurs exactly at the minimum of the Average Cost curve. At this exact geometric point, what is the firm's super-normal profit?

A Equal to Normal Profit

B Infinity

C Equal to Total Fixed Cost

D Zero

💡 Short Explanation

At break-even, Total Revenue equals Total Cost. The firm earns only normal profit. Therefore, super-normal profit is zero.

✅ Correct Answer Explanation

At the break-even point: Market Price = Average Cost. Total Revenue = Total Cost. The firm earns normal profit only. Since all economic costs (including normal profit) are covered: Super-normal Profit = 0 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Equal to Normal Profit

Super-normal profit is the amount above normal profit, which is zero at break-even.

Option B → Infinity

This has no economic meaning in this context.

Option C → Equal to Total Fixed Cost

Fixed cost has no direct relationship with super-normal profit.

🎯 Strategy

Used

Conceptual Elimination

Application:

Recall the definition of break-even and distinguish between normal and super-normal profit.

Final Logic:

Break-even means only normal profit is earned, so super-normal profit is zero.

🧠 Memory Trick

Break-even = Zero Super Profit

📚 Class XI – Introductory Microeconomics – Chapter: The Theory of the Firm under Perfect Competition – Topic: Break-even and Super-normal Profit

CUET UG Booster Economics 4 Test (D3)

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