CUET UG Booster Economics 4 Test (M3)
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QUESTION 1 OF 20
If a firm sells 10 boxes of candles at Rs 10 each and its total cost is Rs 80, what is the profit (Profit) calculated using the profit definition?
QUESTION 2 OF 20
Identify the correct statement regarding the gap between TR and TC:
QUESTION 3 OF 20
A firm maintains the assumption of being a ruthless profit maximiser. Therefore, the amount it produces and sells in the market is exactly that which ________.
QUESTION 4 OF 20
Assertion (A): At the optimal output q0, a firm's profits are less than at any other output level.
Reason (R): q0 is defined as the point where total cost exceeds total revenue by the largest margin.
QUESTION 5 OF 20
As long as the change in total revenue is greater than the change in total cost per unit increase in output:
QUESTION 6 OF 20
For a perfectly competitive firm, MR = P. Since profit maximisation requires MR = MC, what substituted equation dictates the profit-maximising output?
QUESTION 7 OF 20
Arrange the sequence of events when a firm expands production from a point where MR > MC:
1. Marginal Cost approaches Marginal Revenue.
2. Total Profit increases.
3. Firm decides to increase output by one unit.
4. MR > MC is observed at the current output level.
QUESTION 8 OF 20
If a firm finds that its marginal revenue is less than its marginal cost at a specific output level, what should it do to move towards maximum profit?
QUESTION 9 OF 20
Why is a non-decreasing MC curve required at the profit-maximising output?
QUESTION 10 OF 20
Graphically, the final profit-maximising point on the Marginal Cost curve must exclusively occur on its:
QUESTION 11 OF 20
QUESTION 12 OF 20
QUESTION 13 OF 20
If the market price is strictly less than the minimum of Long Run Average Cost (LRAC), a profit-maximising firm will:
QUESTION 14 OF 20
In the long run set-up, a firm that decides to shut down and completely exit the market has a total profit of:
QUESTION 15 OF 20
Match the graphical rectangles with their corresponding economic meaning at output q1:
| List I | List II |
|---|---|
| 1. Op x Oq1 | a. Short-run Zero Output Condition |
| 2. OE x Oq1 (where E is height of SAC) | b. Total Profit (net of costs) |
| 3. Area of (Op x Oq1) - Area of (OE x Oq1) | c. Total Revenue |
| 4. 4Oq1 = 0 | d. Total Cost |
QUESTION 16 OF 20
The condition P >= AVC essentially serves as a foundational rule for:
QUESTION 17 OF 20
Assertion (A): At the equilibrium output q0, all three conditions for short-run profit maximisation are completely satisfied.
Reason (R): Equilibrium q0 only occurs where the SMC curve is downward sloping.
QUESTION 18 OF 20
If a firm sells 5 units at Rs 20 each, and its Short Run Average Cost (SAC) at 5 units is Rs 15, calculate the specific profit area value.
QUESTION 19 OF 20
Normal profits are essentially considered a part of the firm's:
QUESTION 20 OF 20
When a firm's total revenue strictly exceeds its total economic costs (including normal profit), the excess is explicitly termed as ________.
Test Complete!
Answer Review
1 If a firm sells 10 boxes of candles at Rs 10 each and its total cost is Rs 80, what is the profit (Profit) calculated using the profit definition?
Profit is calculated as Total Revenue minus Total Cost. Total Revenue = Selling Price x Quantity Sold. Profit = Rs 100 - Rs 80 = Rs 20.
According to NCERT, a firm's profit is calculated as: Profit = Total Revenue - Total Cost Step 1: Total Revenue = Selling Price x Quantity = Rs 10 x 10 = Rs 100 Step 2: Profit = Total Revenue - Total Cost = Rs 100 - Rs 80 = Rs 20 Therefore, Option B is correct. Why the remaining options are incorrect: Option A underestimates the profit. Option C represents the Total Cost, not the profit. Option D represents the Total Revenue, not the profit earned after deducting costs.
- Option A → Rs 10
- This is not obtained using the profit formula.
- Option C → Rs 80
- Rs 80 is the Total Cost, not the profit.
- Option D → Rs 100
- Rs 100 is the Total Revenue before deducting costs.
Used
- Substitution
Application:
- Substitute the given numerical values into the formula:
- Profit = Total Revenue - Total Cost.
Final Logic:
- Total Revenue = Rs 100 and Total Cost = Rs 80, so Profit = Rs 20.
Profit = Revenue - Cost
2 Identify the correct statement regarding the gap between TR and TC:
The difference between Total Revenue and Total Cost is Profit. Profit represents the firm's earnings after meeting all costs. A firm's objective is to maximise this difference.
The difference between Total Revenue (TR) and Total Cost (TC) is called Profit. Profit = Total Revenue - Total Cost This difference shows the firm's net earnings after covering all production costs. A rational firm under perfect competition aims to maximise this profit by choosing the appropriate output level. Therefore, Option C is correct. Why the remaining options are incorrect: Option A is incorrect because the gap represents profit, not Total Fixed Cost. Option B is incorrect because firms try to maximise the gap between TR and TC, not minimise it. Option D is incorrect because firms can operate while earning normal profit, super-normal profit, or even short-run losses under certain conditions.
- Option A → The gap represents the total fixed cost of the firm.
- The gap between TR and TC measures profit, not fixed cost.
- Option B → The firm wishes to minimise this gap to increase efficiency.
- Firms seek to maximise profit, which means maximising the gap between TR and TC.
- Option D → The gap must always be strictly zero for the firm to operate.
- A firm may earn positive profit, normal profit, or incur temporary losses in the short run.
Used
- Conceptual Elimination
Application:
- Recall the basic profit equation from NCERT and eliminate options that confuse profit with cost or business objectives.
Final Logic:
- Since Profit = Total Revenue - Total Cost, the gap represents the firm's net earnings, which it aims to maximise.
TR - TC = Profit
3 A firm maintains the assumption of being a ruthless profit maximiser. Therefore, the amount it produces and sells in the market is exactly that which ________.
A firm's primary objective is profit maximisation. It chooses the output level that gives the highest profit. Profit equals Total Revenue minus Total Cost.
According to the NCERT, the fundamental assumption of the theory of the firm under perfect competition is that the firm aims to maximise its profit. The firm compares its revenue and costs and selects the output level where the difference between Total Revenue (TR) and Total Cost (TC) is the greatest. Therefore, the quantity produced and sold is the one that maximises profit. Hence, Option D is correct. Why the remaining options are incorrect: Option A contradicts the objective of a firm because firms never seek to minimise Total Revenue. Option B is incorrect because firms do not attempt to maximise Marginal Cost. Option C is incorrect because Total Cost can never be zero in production.
- Option A → Minimises its total revenue
- Firms aim to maximise revenue subject to costs, not minimise it.
- Option B → Maximises its marginal cost
- Marginal Cost is not the firm's objective; it is used in decision-making.
- Option C → Equates total cost to zero
- Production always involves costs.
Used
- Conceptual Elimination
Application:
- Recall the basic objective of the firm under perfect competition and eliminate options that contradict this assumption.
Final Logic:
- The firm's objective is to maximise profit.
Firm = Profit First
4 Assertion (A): At the optimal output q0, a firm's profits are less than at any other output level.
Reason (R): q0 is defined as the point where total cost exceeds total revenue by the largest margin.
At the optimal output q0, profit is maximum, not minimum. Profit is highest where Total Revenue exceeds Total Cost by the greatest amount. Therefore, both the Assertion and Reason are false.
The Assertion is false because at the optimal output q0, the firm's profit is maximum, not less than at any other output level. The Reason is also false because q0 is not the point where Total Cost exceeds Total Revenue. Instead, it is the point where the difference between Total Revenue and Total Cost is the greatest, resulting in maximum profit. Therefore, both statements are false, making Option A the correct answer. Why the remaining options are incorrect: Option B is incorrect because the Assertion itself is false. Option C is incorrect because neither statement is true. Option D is incorrect because the Reason is also false.
- Option B → A true, R false
- The Assertion is incorrect because profit is highest at q0.
- Option C → Both true, R explains A
- Both statements contradict the concept of profit maximisation.
- Option D → A false, R true
- The Reason is also incorrect.
Used
- Elimination
Application:
- Evaluate the Assertion and Reason separately before checking whether the Reason explains the Assertion.
Final Logic:
- Maximum profit occurs where TR exceeds TC by the greatest amount, so both statements are false.
q0 = Maximum Profit
5 As long as the change in total revenue is greater than the change in total cost per unit increase in output:
Change in Total Revenue represents Marginal Revenue. Change in Total Cost represents Marginal Cost. If MR is greater than MC, profit increases with additional output.
When the increase in Total Revenue from producing one more unit is greater than the increase in Total Cost, MR > MC Each additional unit contributes more to revenue than to cost, causing profit to rise. The firm should continue expanding production until MR = MC. Therefore, Option C is correct. Why the remaining options are incorrect: Option A is opposite to the actual effect. Option B is incorrect because MR is greater than MC, not equal. Option D is unrelated to the given condition.
- Option A → Profits will fall
- Profit actually increases while MR exceeds MC.
- Option B → Marginal revenue equals marginal cost
- The question clearly states revenue change is greater than cost change.
- Option D → The firm reaches its break-even point
- Break-even depends on Total Revenue equalling Total Cost, not MR exceeding MC.
Used
- Conceptual Elimination
Application:
- Compare the additional revenue with the additional cost of producing one more unit.
Final Logic:
- When MR exceeds MC, producing more increases profit.
MR > MC = More Profit
6 For a perfectly competitive firm, MR = P. Since profit maximisation requires MR = MC, what substituted equation dictates the profit-maximising output?
Under perfect competition, Marginal Revenue (MR) equals Price (P). Profit maximisation requires MR = MC. Therefore, the condition becomes P = MC.
For a perfectly competitive firm: Marginal Revenue (MR) = Price (P). The first condition for profit maximisation is: MR = MC Substituting Price (P) in place of MR gives: P = MC This determines the profit-maximising output. Therefore, Option A is correct. Why the remaining options are incorrect: Option B incorrectly equates Price with Total Cost. Option C incorrectly equates Price with Total Revenue. Option D represents the shutdown condition, not the profit-maximisation condition.
- Option B → P = TC
- Price and Total Cost measure different economic concepts.
- Option C → P = TR
- Price is a per-unit value, whereas Total Revenue is a total amount.
- Option D → P = AVC
- This is the short-run shutdown point, not the equilibrium condition.
Used
- Substitution
Application:
- Replace MR with Price using the relationship MR = Price.
Final Logic:
- MR = MC becomes P = MC.
MR = P → P = MC
7 Arrange the sequence of events when a firm expands production from a point where MR > MC:
1. Marginal Cost approaches Marginal Revenue.
2. Total Profit increases.
3. Firm decides to increase output by one unit.
4. MR > MC is observed at the current output level.
The firm first observes MR > MC. It increases production. Profit rises. Eventually, MC moves closer to MR.
The correct sequence is: 4 → The firm first observes MR > MC. 3 → Since additional revenue exceeds additional cost, it decides to produce one more unit. 2 → Producing more increases total profit. 1 → As output expands, Marginal Cost rises and approaches Marginal Revenue. Thus, Option D is correct. Why the remaining options are incorrect: Option A begins with the final stage. Option B starts after the decision has already been made. Option C places profit before the production decision.
- Option A
- Begins with the outcome rather than the initial condition.
- Option B
- Incorrectly places the firm's decision before identifying MR > MC.
- Option C
- Profit cannot increase before output is expanded.
Used
- Contextual/Tonal Matching
Application:
- Arrange the events in the logical order of production decisions.
Final Logic:
- Observation → Decision → Profit Increase → MC approaches MR.
Observe → Produce → Profit → Balance
8 If a firm finds that its marginal revenue is less than its marginal cost at a specific output level, what should it do to move towards maximum profit?
MR < MC means producing an extra unit reduces profit. The firm should reduce production. Output should be decreased until MR = MC.
When: MR < MC the additional cost of producing one more unit exceeds the additional revenue earned. This means each extra unit reduces profit. To restore profit maximisation, the firm should reduce output until the condition MR = MC is achieved. Therefore, Option A is correct. The other options are incorrect because: Option B would increase losses. Option C is not possible since the firm is a price taker. Option D is unnecessary because MR < MC alone does not require shutdown.
- Option B → Increase its output
- Additional units reduce profit when MR < MC.
- Option C → Keep output constant and increase price
- A perfectly competitive firm cannot change the market price.
- Option D → Shut down immediately regardless of fixed costs
- Shutdown depends on the Price and AVC relationship, not merely MR < MC.
Used
- Conceptual Elimination
Application:
- Compare the additional revenue with the additional cost.
Final Logic:
- MR below MC means output should be reduced.
MR < MC → Cut Output
9 Why is a non-decreasing MC curve required at the profit-maximising output?
The MC curve must be rising at equilibrium. A falling MC curve violates the second-order condition. Maximum profit cannot occur on a downward-sloping MC curve.
The second condition for profit maximisation requires the Marginal Cost curve to be non-decreasing (rising) where MR = MC. If the MC curve is downward sloping: A slightly lower output can generate a higher profit. The equilibrium is unstable. Therefore, the point cannot represent maximum profit. Hence, Option C is correct. The remaining options do not explain the purpose of the rising MC condition.
- Option A → Because it ensures that Total Cost is zero.
- Profit maximisation does not require zero Total Cost.
- Option B → Because a downward sloping MC means average costs are constantly rising.
- A falling MC does not necessarily imply rising average costs.
- Option D → Because price is always falling in this region.
- Market price remains constant under perfect competition.
Used
- Conceptual Elimination
Application:
- Recall the second-order condition for profit maximisation.
Final Logic:
- Only a rising MC curve guarantees maximum profit.
Maximum Profit = Rising MC
10 Graphically, the final profit-maximising point on the Marginal Cost curve must exclusively occur on its:
The MC curve must be rising at equilibrium. This satisfies the second condition of profit maximisation. Therefore, the equilibrium lies on the rising portion of the MC curve.
Profit maximisation requires two conditions: MR = MC MC must be rising (non-decreasing). Therefore, the profit-maximising point cannot lie on: The falling portion of the MC curve. The minimum point unless MC is rising after that point. The y-intercept. Instead, it must occur on the rising part of the MC curve. Hence, Option B is correct.
- Option A → Falling segment
- This violates the second-order condition.
- Option C → Minimum point exactly
- The minimum point alone does not guarantee maximum profit.
- Option D → Y-intercept
- The y-intercept has no role in determining equilibrium output.
Used
- Contextual/Tonal Matching
Application:
- Use the graphical condition for profit maximisation.
Final Logic:
- Maximum profit occurs only on the rising part of the MC curve.
Rising MC = Maximum Profit
11
When Price is less than AVC, production cannot cover variable costs. Producing results in a loss greater than Total Fixed Cost. Therefore, shutting down is the better option.
According to the passage and NCERT, when: Price < Average Variable Cost (AVC) the firm's Total Revenue is insufficient to recover even its Total Variable Cost. Therefore, Profit = Total Revenue - Total Cost Since: Total Revenue < Total Variable Cost Total Cost = Total Variable Cost + Total Fixed Cost the firm's loss becomes greater than Total Fixed Cost. If the firm shuts down instead: Total Revenue = 0 Total Variable Cost = 0 Loss = Total Fixed Cost only. Hence, producing results in a profit (loss) strictly less than -TFC. Therefore, Option A is correct.
- Option B → Exactly equal to +TFC
- Profit cannot become positive when Price is below AVC.
- Option C → Zero
- Production results in a loss, not zero profit.
- Option D → Greater than normal profit
- The firm is making losses, not profits.
Used
- Contextual/Tonal Matching
Application:
- Use the information given in the passage and apply the short-run shutdown rule.
Final Logic:
- When P < AVC, production causes losses greater than Total Fixed Cost.
P < AVC → Loss > TFC
12
During shutdown, production stops completely. Variable costs become zero. Only fixed costs remain.
When the firm shuts down: Output = 0 Total Revenue = 0 Total Variable Cost = 0 However, Total Fixed Cost must still be paid because fixed costs cannot be avoided in the short run. Therefore, Loss = Total Fixed Cost. This is why firms shut down when Price falls below AVC—to minimise losses. Hence, Option D is correct.
- Option A → Total Variable Cost
- Variable costs disappear after shutdown.
- Option B → Super-normal Profit
- Shutdown never generates profit.
- Option C → Total Cost
- Total Cost becomes only the fixed cost after shutdown.
Used
- Conceptual Elimination
Application:
- Recall which costs remain after production stops.
Final Logic:
- Shutdown leaves only Total Fixed Cost.
Shutdown = Only TFC
13 If the market price is strictly less than the minimum of Long Run Average Cost (LRAC), a profit-maximising firm will:
In the long run, firms must recover all costs. Price below LRAC means total costs cannot be covered. The firm exits the industry.
In the long run: All costs are variable. Firms must cover Long Run Average Cost (LRAC). If: Price < Minimum LRAC the firm cannot recover all production costs. Therefore, the profit-maximising decision is to: Stop production. Exit the industry. Hence, Option B is correct.
- Option A → Increase production
- Increasing output increases losses.
- Option C → Produce where P = minimum AVC
- AVC is a short-run concept.
- Option D → Earn super-normal profits
- Price below LRAC results in losses.
Used
- Conceptual Elimination
Application:
- Differentiate between short-run continuation and long-run exit conditions.
Final Logic:
- Price below LRAC forces the firm to exit.
P < LRAC → Exit
14 In the long run set-up, a firm that decides to shut down and completely exit the market has a total profit of:
Fixed costs do not exist in the long run. After exit, no production costs are incurred. Therefore, total profit becomes zero.
In the long run: There are no fixed costs because all factors of production are variable. When a firm exits the market, it stops production completely and incurs no production costs. Thus: Total Revenue = 0 Total Cost = 0 Profit = Total Revenue - Total Cost = 0 Therefore, Option C is correct.
- Option A → -TFC
- Fixed costs do not exist in the long run.
- Option B → -TVC
- Variable costs disappear after exit.
- Option D → Normal profit
- A firm that exits earns no profit.
Used
- Conceptual Elimination
Application:
- Recall the difference between short-run shutdown and long-run exit.
Final Logic:
- No production means no revenue and no costs in the long run.
Long Run Exit = Zero Profit
15 Match the graphical rectangles with their corresponding economic meaning at output q1:
| List I | List II |
|---|---|
| 1. Op x Oq1 | a. Short-run Zero Output Condition |
| 2. OE x Oq1 (where E is height of SAC) | b. Total Profit (net of costs) |
| 3. Area of (Op x Oq1) - Area of (OE x Oq1) | c. Total Revenue |
| 4. 4Oq1 = 0 | d. Total Cost |
Price x Quantity represents Total Revenue. SAC x Quantity represents Total Cost. Their difference gives Total Profit. Zero output represents the shutdown condition.
The correct matching is: 1 → c : Price x Quantity = Total Revenue. 2 → d : SAC x Quantity = Total Cost. 3 → b : Total Revenue - Total Cost = Total Profit. 4 → a : Zero output represents the short-run shutdown condition. Therefore, Option D is correct.
- Option A
- Incorrectly exchanges Total Revenue and Profit.
- Option B
- Incorrectly matches Total Revenue with Total Cost.
- Option C
- Incorrectly associates Price x Quantity with shutdown.
Used
- Option Grouping
Application:
- Identify the standard graphical rectangles before matching the remaining concepts.
Final Logic:
- Revenue = Price x Quantity, Cost = SAC x Quantity, Profit = Difference.
PQ = Revenue, ACQ = Cost
16 The condition P >= AVC essentially serves as a foundational rule for:
Price >= AVC is the short-run shutdown condition. It helps the firm decide whether to continue production. The objective is to minimise losses.
In the short run, a firm compares Price (P) with Average Variable Cost (AVC). If P >= AVC, the firm continues production because it covers all variable costs and contributes towards fixed costs. If P < AVC, the firm shuts down because producing would increase losses. Thus, the rule P >= AVC is fundamentally a loss minimisation rule, not a profit-maximisation rule by itself. Therefore, Option A is correct. Why the remaining options are incorrect: Option B is incorrect because the rule applies to all firms, not only those earning super-normal profits. Option C is incorrect because break-even occurs when Price equals Average Cost (AC), not AVC. Option D is incorrect because firms never aim to maximise variable costs.
- Option B → Earning super-normal profit only
- The AVC rule applies even when firms are earning losses.
- Option C → Identifying the break-even point
- Break-even is determined by Price = AC, not Price = AVC.
- Option D → Maximising total variable costs
- Firms attempt to minimise costs, not maximise them.
Used
- Conceptual Elimination
Application:
- Differentiate between the shutdown condition and the break-even condition.
Final Logic:
- Price >= AVC is the short-run loss-minimisation rule.
AVC = Avoid Bigger Loss
17 Assertion (A): At the equilibrium output q0, all three conditions for short-run profit maximisation are completely satisfied.
Reason (R): Equilibrium q0 only occurs where the SMC curve is downward sloping.
All three profit-maximisation conditions hold at equilibrium. The SMC curve must be rising, not falling. Therefore, the Assertion is true and the Reason is false.
The Assertion is true because the equilibrium output satisfies: MR = MC (or Price = MC under perfect competition). MC is non-decreasing (rising). Price >= AVC in the short run. The Reason is false because equilibrium cannot occur on the downward-sloping portion of the SMC curve. The second condition requires the SMC curve to be rising. Therefore, Option B is correct.
- Option A → Both false
- The Assertion is correct.
- Option C → Both true, R explains A
- The Reason contradicts the second-order condition.
- Option D → A false, R true
- Neither part of this option is correct.
Used
- Elimination
Application:
- Evaluate the Assertion and Reason independently before checking whether the Reason explains the Assertion.
Final Logic:
- Maximum profit occurs only where the MC curve is rising.
Rising MC = Right Equilibrium
18 If a firm sells 5 units at Rs 20 each, and its Short Run Average Cost (SAC) at 5 units is Rs 15, calculate the specific profit area value.
Total Revenue = Price x Quantity. Total Cost = SAC x Quantity. Profit = Total Revenue - Total Cost.
Step 1: Total Revenue = Rs 20 x 5 = Rs 100 Step 2: Total Cost = SAC x Quantity = Rs 15 x 5 = Rs 75 Step 3: Profit = Total Revenue - Total Cost = Rs 100 - Rs 75 = Rs 25 Therefore, Option D is correct. Why the remaining options are incorrect: Option A is Total Revenue. Option B is Total Cost. Option D is the profit per unit, not total profit.
- Option A → Rs 100
- Represents Total Revenue.
- Option B → Rs 75
- Represents Total Cost.
- Option D → Rs 5
- Represents profit per unit only.
Used
- Substitution
Application:
- Use the formulas:
- Total Revenue = Price x Quantity
- Total Cost = SAC x Quantity
- Profit = Total Revenue - Total Cost
Final Logic:
- Rs 100 - Rs 75 = Rs 25.
Revenue - Cost = Profit
19 Normal profits are essentially considered a part of the firm's:
Normal profit is the entrepreneur's opportunity cost. It is included in Total Cost. Firms earn normal profit in long-run equilibrium.
According to NCERT, Normal Profit is treated as part of the firm's Total Cost because it represents the entrepreneur's opportunity cost. It is the minimum return required to keep the entrepreneur in the current business. Therefore: Normal profit is included in economic costs. It is not an extra reward above Total Cost. Hence, Option D is correct.
- Option A → Total Fixed Cost only
- Normal profit is not a fixed cost.
- Option B → Total Revenue entirely
- Revenue includes income before deducting costs.
- Option C → Super-normal excess
- Super-normal profit is earned above normal profit.
Used
- Odd One Out
Application:
- Identify which option correctly describes the economic treatment of normal profit.
Final Logic:
- Normal profit is treated as an opportunity cost.
Normal Profit = Opportunity Cost
20 When a firm's total revenue strictly exceeds its total economic costs (including normal profit), the excess is explicitly termed as ________.
Super-normal profit is earned above normal profit. It exists when Total Revenue exceeds Total Economic Cost. It is also called economic or abnormal profit.
Super-normal profit is the profit earned after covering: Explicit costs Implicit costs Normal profit When: Total Revenue > Total Economic Cost the excess amount is called Super-normal Profit. It usually attracts new firms into the industry, causing profits to fall towards normal profit in the long run. Therefore, Option A is correct.
- Option B → Normal profit
- Normal profit is only the minimum return required to remain in business.
- Option C → Marginal profit
- This is not an NCERT profit concept.
- Option D → Break-even profit
- Break-even refers to normal profit, not profit above it.
Used
- Odd One Out
Application:
- Identify the standard NCERT term for profit earned above normal profit.
Final Logic:
- Profit above normal profit is called Super-normal Profit.
Super = Above Normal