2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

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Karnataka 2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

2nd PUC Economics The Theory of the Firm Under Perfect Competition One Mark Questions and Answers

1. Choose The Correct Answer.

Question 1.
In a perfect competition each firm produces and sells
(a) Hetrogenous products
(b) Homogeneous Products
(c) Luxury goods
(d) Neccessary goods
Answer:
(b) Homogeneous Products

Question 2.
The increase in total revenue for a unit increase in the output is
(a) Marginal Revenue
(b) Average Revenue
(c) Total Revenue
(d) Fixed Revenue
Answer:
(a) Marginal Revenue

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 3.
The firm’s profit is denoted by
(a) 1
(b) li
(c) 0
(d) n
Answer:
(d) n

Question 4.
When the supply curve is verticle the elasticity of supply is
(a) es = 1
(b) es > 1
(c) es = 0
(d) ex = oo
Answer:
(c) es = 0

Question 5.
The revenue per unit of output of a firm is called as
(a) TR
(b) MR
(c) AR
(d) None of these
Answers:
(c) AR

Question 6.
A seller cannot influence the market price under
(a) Perfect competition
(b) Monopoly
(c) Monopolistic Competition
(d) All of the above
Answer:
(a) Perfect competition

Question 7.
Marginal revenue (MR) curve is a straight horizontal line in
(a) Oligopoly market
(b) Monopoly market
(c) Perfectly competitive market
(d) Monopolistic competitive market
Answer:
(c) Perfectly competitive market

Question 8.
In the long run, a firm in a perfectly competitive market earns
(a) Abnormal profit
(b) normal profit
(c) Loss
(d) Supernormal profit
Answer:
(b) normal profit

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 9.
Supply of a commodity is a concept.
(a) stock
(b) flow
(c) both (a) and
(b) (d) none
Answer:
(b) flow

Question 10.
The claim that other things remain constant, if the price increases for a good leads to increase in the quantity supplied of the good is known as
(a) Law of Demand
(b) Law of Economics
(c) Law of supply
(d) all of these
Answer:
(c) Law of supply

Question 11.
When supply is perfectly inelastic, Elasticity of Supply is equal to
(a) -1
(b) Zero
(c) 1
(d) Infinity
Answer:
(b) Zero

Question 12.
A perfectly inelastic supply curve will be
(a) parallel to X-axis
(b) parallel to Y-axis
(c) Downward sloping
(d) None of these
Answer:
(b) parallel to Y-axis

Question 13.
The supply of a good refers to:
(a) Actual production of the good
(b) total existing stock of good
(c) stock available for sale
(d) Amount of goods offered for sale at a particular place and time.
Answer:
(d) Amount of goods offered for sale at a particular place and time.

Question 14.
AR is also known as
(a) Price
(b) Income
(c) Revenue
(d) cost
Answer:
(a) Price

Question 15.
The term market refers to a ________
(a) Place where seller does not bargain
(b) Place where buyers does not bargain.
(c) Place where buyers and sellers bargain a product or service for a price.
(d) None of these
Answer:
(c) Place where buyers and sellers bargain a product or service for a price.

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 16.
Suppose a firm is producing a level of output such that MR > MC, What should be firm do to maximize itso profits?
(a) The firm should do nothing
(b) The firm should hire less labour
(c) Place where buyers and sellers bargain a product or service for a price.
(d) The firm should increase output
Answer:
(d) The firm should increase output

Question 17.
Marginal Revenue is equal to
(a) The change in price divided by the change in output
(b) the change in quantity divided by the change in price
(c) the change P x Q due to a one unit change in output.
(d) price, but only if the firm is a price searcher
Answer:
(c) the change P x Q due to a one unit change in output.

Question 18.
Which of the following is not an essential condition of pure competition?
(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Freedom of entry
(d) Absence of transport cost
Answer:
(d) Absence of transport cost

Question 19.
What is the shape of the demand curve faced by a firm under perfect competition?
(a) Horizontal
(b) Vertical
(c) Positively sloped
(d) Negatively sloped
Answer:
(a) Horizontal

Question 20.
Which is the first order condition for the profit of a firm to be maximum?
(a) AC = MR
(b) MC = MR
(c) MR = AR
(d) AC = AR
Answer:
(b) MC = MR

Question 21.
Which of the following is not a condition of perfect competition?
(a) A large number of firms
(b) Perfect mobility of factors
(c) Informative advertising to ensure that consumers have good information
(d) Freedom of entry and exit into and out of the market
Answer:
(c) Informative advertising to ensure that consumers have good information

Question 22.
Average revenue curve is also known as
(a) Profit curve
(b) Demand Curve
(c) Average Cost curve
(d) Indifference Curve
Answer:
(b) Demand Curve

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 23.
Under which of the following forms of market structure does a firm have no control over the price of its product?
(a) Monopoly
(b) Monopolistic competition
(c) Oligopoly
(d) Perfect competition
Answer:
(d) Perfect competition

Question 24.
Under perfect competition, in the long run, there will be no
(a) Normal profits
(b) supernormal profits
(c) production
(d) costs
Answer:
(b) supernormal profits

Question 25.
When , we know that the firms are earning just normal profits.
(a) AC = AR
(b) MC = MR
(c) MC = AC
(d) AR = MR
Answer:
(a) AC = AR

Question 16.
Agricultural goods markets depict characteristics close to
(a) perfect competition
(b) oligopoly
(c) monopoly
(d) monopolistic competition
Answer:
(a) perfect competition

Question 27.
Total Revenue =
(a) price x quantity
(c) income x quantity
(b) price x income
(d) none of the above
Answer:
(a) price x quantity

Question 28.
Average revenue is the revenue earned
(a) per unit of input
(b) per unit of output
(c) different units of input
(d) different units of output
Answer:
(b) per unit of output

Question 29.
AR can be symbolically written as
(b) price x quantity
(c) TR/Q
(d) none of the above
(a) MR/Q
Answer:
(c) TR/Q

Question30
AR is also known as
(a) price
(b) income
(c) revenue
(d) none of the above
Answer:
(a) price

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 31
Marginal revenue can be defined as the change in total revenue resulting from the
(a) purchase of an additional unit of a commodity
(b) sales of an additional unit of a commodity
(c) sale of subsequent units of a product
(d) none of the above
Answer:
(b) sales of an additional unit of a commodity

Question 32.
Average Revenue is equal to
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 9
Answer:
(a) \(\frac{\text { Total Revenue }}{\text { Quantity Sold }}\)

Question 33.
When the firm is producing 3 tonnes of sugar, it receives total Revenue of ₹ 24 Marginal Revenue is
(a) ₹ 4
(b) ₹ 8
(c) ₹ 28
(d] ₹ 52
Answer:
(a) ₹ 4

Question 34.
When Marginal Revenue is zero
(a) Total Revenue is also zero
(b) Total Revenue is the maximum
(c) Total Revenue is the minimum
(d) Total Revenue starts increasing sharply
Answer:
(b) Total Revenue is the maximum

Question 34.
A perfectly competitive firm attains equilibrium at a point where
(a) MR is equal to MC and MC curve intersects MR curve from below
(b) MC is equal to MR
(c) MC is falling but is equal to AC
(d) Both (a) and (b)
Answer:
(a) MR is equal to MC and MC curve intersects MR curve from below

Question 35.
Supply is the
(a) limited resources that are available with the seller
(b) cost of producing a good
(c) entire relationship between the quantity supplied and the price of good
(d) Willingness to produce a good if the technology to produce it becomes available.
Answer:
(c) entire relationship between the quantity supplied and the price of good

Question 36.
The elasticity of supply is defined as the
(a) responsiveness of the quantity supplied of a good to a change in its price
(b) responsiveness of the quantity supplied of a good without change in its price
(c) responsiveness of the quantity demanded of a good to a change in its price
(d) responsiveness of the quantity demanded of a good without change in its price
Answer:
(a) responsiveness of the quantity supplied of a good to a change in its price

Question 37.
Elasticity of supply is zero means
(a) perfectly inelastic supply
(b) perfectly elastic supply
(c) imperfectly elastic supply
(d) none of the above
Answer:
(a) perfectly inelastic supply

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 38.
Elasticity of supply is greater than one when
(a) proportionate change in quantity supplied is more than the proportionate change in price
(b) proportionate change in price is greater than the proportionate change in quantity supplied
(c) change in price and quantity supplied are equal
(d) None of the above
Answer:
(a) proportionate change in quantity supplied is more than the proportionate change in price

Question 39.
The supply curve shifts to the right because of
(a) improved technology
(b) increased price of factors of production
(c) increasec excise duty
(d) all of the above
Answer:
(a) improved technology

II. Fill in the Blanks

1. Price taking behahaviour is the single most distinguishing characteristic of _____ Market
Answer:
Perfect Competition

2______is a tax that the government imposes per unit sale of output .
Answer:
Unit Tax

3. For a price taking firm marginal revenue is equal to _____
Answer:
The Market Price

4. The point of minimum AVC where the SMC curves cuts the AVC curves is called_____
Shut Down point

5. _____ Cost of some activity is the gain forgone from the second best activity.
Answer:
Opportunity

6. ______ is a price taker in perfect competition market.
Answer:
Each Firm

7. Profit = TR – _____
Answer:
TC

8. When supply curve shifts to the right, there is_____in supply.
Answer:
An Increase

9. _____is the shape of the demand curve faced by a firm under perfect competition.
Answer:
Horizontal

10. The process of determination of price by supply and demand forces is called as _____
Answer:
Price Mechanism

11. Equilibrium price is where the quantity of demand and supply will be _____.
Answer:
Equal.

12. _____refers to ratio of proportionate change in the supply to that of proportionate change in
Answer:
Price elasticity of supply

13. The point on the supply curve at which a firm earns normal profit is called_____of the firm
Answer:
Break-even point

III. Match the following

Question 1.

A B
1. TR a) Perfect information
2. π b) Zero profit
3. AR = c) P x Q
4. Normal Profit d) TR – TC
5. Perfect information e) TR/Q

Answers:
1. (c) P x Q
2. (d) TR-TC
3. (e) TR/Q
4. (b) Zero profit
5. (a) Perfect information

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 2.

A B
1. Perfect Competition a. Tax imposed on per unit sale of output
2. Price Line b. Difference between TR and TC
4. Shut down point c. Price remains ≥ to minimum of AVC
3.Profit d. Homogeneous product
5. Unit Tax e. Average Revenue (AR)

Answers:
1. (d) Homogeneous product
2. (e) Average Revenue (AR)
3. (b) Difference between TR and TC
4. (c) Price remains ≥ to minimum of AVC
5. (a) Tax imposed on per unit sale of output

IV. Answer the following questions in a sentence/word.

Question 1.
Define marginal revenue.
Answer:
Marginal revenue of a firm is defined as the increase in total revenue for a unit increase in the firm’s output.

Question 2.
To which side does supply curve shift due to the technological progress?
Answer:
Supply curve will shift to Right

Question 3.
Write the formula to calculate average revenue.
Answer:
The average revenue is calculated as follows,
AR = TR/Q

Question 4.
What is normal profit?
Answer:
A firm will be earning normal profits, if its revenue is sufficient to cover all its costs. Normal profit is a situation where the revenue will be equal to its costs.
Normal Profit = TR – TC. It is a situation of Zero profit.

Question 5.
Give the meaning of super normal profit.
Answer:
Profit that a firm earns over and above the normal profit is called the super-normal profit.

Question 6.
What does market supply curve show?
Answer:
The market supply curve shows the output levels(plotted on the x-axis] that firms in the market produce in aggregate corresponding to different values of the market price [plotted on the y-axis).

2nd PUC Economics The Theory of the Firm Under Perfect Competition Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Mention the conditions needed for profit by a firm under perfect competition.
Answer:
For profits to be maximum, three conditions must hold at q0
(a) The price, p, must be equal to MC.
(b) MC must be non-decreasing at q0.
(c) 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].

Question 2.
Give the meaning of shut down point.
Answer:
A firm continues to produce as long as the price remains greater than or equal to the minimum of AVC. Below the minimum point of AVC there will be no production, so the point where SMC curve cuts AVC curve at the minimum is called the shut down point of the firm.

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 3.
Write the meaning of opportunity cost with an example.
Answer:
Opportunity cost of some activity is the gain foregone from the second best activity. For example, if a person is having 2 acre of land he can cultivate paddy or wheat. By cultivating paddy he earns ₹ 40,000. If he cultivates wheat, he may earn ₹ 35,000. In the process of cultivating paddy, he has to sacrifice ₹ 35,000. So the opportunity cost of cultivating paddy is ₹ 35, 000.

Question 4.
Mention the two determinants of a firm’s supply curve.
Answer:
The following are the determinants of supply:

  1. Technological Progress
  2. Input Prices
  3. Tax policy of the Government
  4. Goals of the Firm

Question 5.
Give the meaning of price elasticity of supply and write its formula.
Answer:
Price elasticity of supply is defined as the ratio of proportionate change in the supply of a com-modity to that of proportionate change in the price of the commodity.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 1
∆q = change is quantity supply
∆p = change in price
p = initial price;
q = initial quantity supplied

2nd PUC Economics The Theory of the Firm Under Perfect Competition Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Write a short note on profit maximisation of a firm under the following conditions (a) P = MC (b) MC must be non-decreasing at q0.
Answer:
A firm attains profit under the following conditions
(a) When P = MC
As long as MR is greater than MC, profits are increasing. As long as marginal revenue is less than marginal cost, profits will fall. It follows that for profits to be maximum, marginal revenue should equal marginal cost. Profits are maximum at the level of output (which we have called q0) for which MR = MC
For the perfectly competitive firm, we have established that MR = p. So the firm’s profit maximizing output becomes the level of output at which P = MC.
For the perfectly competitive firm, we have established that MR = p. So the firm’s profit maximizing output becomes the level of output at which P = MC.

(b) MC must be non-decreasing at q0.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 2

Note that at output level q1 and q4, the market price is equal to the marginal cost. However, at output level q1, the MC curve is downward sloping. We claim that q1 cannot be a profit maximizing output level because all output levels slightly to the left of q1 , the market price is lower than MC.

Question 2.
Explain the determinants of a firm’s supply curve.
Answer:
The determinants of a firm’s supply curve are:
(a) Technological Progress: With every improvement in technology, some specialized tools, capital equipment, raw materials, etc, become available. This may reduce the total cost and the marginal cost. Accordingly, producers are willing to supply more at the existing price, as a result supply of producer increases.

(b) Input Prices: Prices of input are another important determinant of the supply curve. In case of increase in input price, cost of production increase. Accordingly, producers will supply less of the commodity as its existing price, as there is a decrease in producer’s profit.
On the other hand, if input prices decreases, the cost of production also decreases, leading to increase in producer’s profit, this results in increase in his supply.

(c) Imposition of Unit Tax: A unit tax is the tax imposed by the government on per unit sale of output. If the government increases the unit tax, marginal cost of production increases and the supply curve moves upwards to the left and the firm supplies fewer units of output. If the government reduces the tax, then the supply curve may shift downwards and the firm may supply more units of output.

Question 3.
Explain the features of perfect competition.
Answer:
The characteristics of perfectly competitive market are:

  1. There will be large number of buyers and sellers of a product.
  2. There is freedom of entry and exit for the firms.
  3. Products of all firms will be homogeneous or identical.
  4. Prevalence of single price.
  5. Perfect market information is available for buyers and sellers.
  6. There is absence of transport costs.
  7. There is free mobility of factors of production.
  8. Each firm is a price maker in perfect competition market.

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 4.
Explain the average revenue or price line of a firm under perfect competition with the help of a diagram.
Answer:
The average revenue of a firm is defined as total revenue per unit of output. If a firms’s output is q and the market price is p, then TR equals pxq. Hence, AR = TR / q = p x q / q = p.
In other words, for a price-taking firm, average revenue equals the market price.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 3

In the above diagram on the OX axis we measure output and OY axis we measure revenue/ market price. Since the market price is fixed at p, we obtain a horizontal straight line that cuts the y-axis at a height equal to p. The horizontal line is called Price Line. It is also called the firm’s AR curve under perfect competition.

The price line also depicts the demand curve facing a firm. Observe that the demand curve is perfectly elastic. This means that a firm can sell as many units of the good as it wants to sell at price p.

Question 5.
Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is ₹ 10.

Quality TR MR AR
0
1
2
3
4
5
6

Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 10

Question 6.
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 ₹ SS1 (Unit) SS2 (Unit)
0 0 0
1 0 0
2 0 0
3 1 1
4 2 2
5 3 3
6 4 4

Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 11

Question 7.
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.
table
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 12

Question 8.
Complete the following table (For Practice only)
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 13
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 14

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 9.
Complete the following table (For Practice only)
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 15
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 16

Question 10.
From the following schedule, calculate TR, AR and MR (For Practice only)
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 17
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 18

Question 11.
Calculate TR and MR (for practice only)

Units sold (Q) AR
1 20
2 36
3 48
4 56
5 60
6 60
7 56

Answer:
HINT : AR = TR / Q and MR= TRn =- Tn-1

Question 12.
Calculate TR and MR ( for practice only )

Units sold (Q) AR
1 25
2 23
3 21
4 19
5 18
6 15

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 19
Answer:
HINT : TR = P x Q = TRn =- Tn-1

Question 13.
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.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 20
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 21

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 14.
The following table shows the total cost schedules of a competitive firm. It is given that the price of the good is ₹ 10. Calculate the profit at each output level. Find the profit maximising level of output.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 22
Answer:
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 23

2nd PUC Economics The Theory of the Firm Under Perfect Competition Six Marks Questions and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the short run supply curve of a firm with the help of a diagram
Answer:
(a) We first determine a firm’s profit-maximising output level when the market price greater than or equal to the minimum of AVC.
Suppose the market price is p1 , which exceeds the minimum AVC. We start out by equating P1 with SMC on the rising part of the SMC curve; this leads to the output level q1 Note also that the AVC at qt does not exceed the market price, p1 Thus the conditions P= SMC, SMC is not decreasing and P≥ AVC are fulfilled. Hence, when the market price is p1, the firm’s output level in the short run is equal to q1
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 4

The diagram shows the output levels chosen by a profit-maximising firm in the short run for two values of the market price p1 and p2. When the market price is p1 , the output level of the firm is q 1: when the market price is p2, the firm produces zero output.

(b) We determine the firm’s profit-maximising output level when market price is less than the minimum of AVC.
Suppose the market price is p2, which is less than the minimum of AVC. We have argued that if a profit-maximising firm produces a positive output in the short run, then the market price is p2, must be greater than or equal to the AVC at that output level. But in the diagram it shows that for all positive output levels, AVC strictly exceeds p2. So, if the market price is p2, the firm produces zero output.

Combining both the cases, we can come to the conclusion that, a firm’s short run supply curve is the rising part of the SMC curve from and above the minimum of AVC together with zero output for all prices strictly less than the minimum of AVC. In the below diagram the bold line represents the short run supply curve of the firm.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 5

2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition

Question 2.
Explain market supply curve with the help of diagram.
Answer:
The market supply curve shows the output levels that firms in the market produce in aggregate corresponding to different values of the market price.
The market supply curve is derived by adding up of the supplies of individual firms at a given set of price (p).
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 6

Construction of market supply curve with just two firms in the market: Firm 1 and Firm 2 and these two firms have different cost structures. Firm 1 will not produce anything if the market price is less than p: and Firm will not produce anything if the market price is less than p2.

In the above diagram S1 curve is the supply curve of Firm 1 and S2 is the supply curve of Firm 2 and Sm is the market supply curve.
Suppose when the market price is less than p1, both the firms will not produce the goods and hence market supply curve will also be zero.

If the price is greater than or equal to p1 and less than p2, only Firm 1 will produce more goods. Therefore, in this range, the market supply curve coincides with the supply curve of Firm 1.

If the price is greater than or equal to p2, both the firms will produce more goods. For example, consider a situation where the market price assumes the value p3 where it is greater than p2 Given p3, Firm 1 supplies q3 units of output while Firm 2 supplies q4 units of output. So, the market supply at price p3 is q5, where q5 = q3 +q4.
We obtain the market supply curve Sm by taking a horizontal summation of the supply curves of the two firms in the market, S1 and S2.

Question 3.
Explain the long run supply curve of a firm with the help of diagram.
Answer:
(a) We first determine the firm’s profit – maximising output level when the market price is greater than or equal to the minimum of AC.

Suppose the market price is px, which is more than the minimum of LRAC. Upon equating p1 with LRMC on the rising part of the LRMC curve, we obtain output level q1 Note also that the LRAC at q1does not exceed the market price, p1 Thus the conditions P= SMC, SMC is not decreasing and P ≥ AVC are fulfilled at q1 Hence, the price is p1, the firm’s supplies in the long run become an output equal to q1
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 7
The diagram shows the output levels chosen by a profit – maximising firm in the long run for two values of the market price p1 and p2. When the market price is p1 the output level of the firm is q1: when the market price is p2 the firm produces zero output.

(b) If the price is less than minimum of LRAC, We have argued that if a profit-maximising firm produces a positive output in the long run, then the market price is p2, must be greater than or equal to the LRAC at that output level. But in the diagram it shows that for all positive output levels, LRAC strictly exceeds p2. So, if the market price is p2 the firm produces zero output.

Combining both the cases, we can come to the conclusion that, a firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum of LRAC together with zero output for all prices strictly less than the minimum of LRAC, In the below diagram the bold line represents the long run supply curve of the firm.
2nd PUC Economics Question Bank Chapter 4 The Theory of the Firm Under Perfect Competition - 8