Important Questions Class 12 Micro Economics Chapter 4

Important Questions Class 12 Micro Economics Chapter 4

Important Questions for CBSE Class 12 Micro Economics Chapter 4 – Theory of the Firm under Perfect Competition

The focus of Class 12 Microeconomics Chapter 4 is on the decision-making process behind the question- How much to produce? In most cases, the answer to this question depends on one factor – Profit maximisation.

As a result, the amount that a firm produces and sells in the market maximises its profit. Here, it’s assumed that the firm sells whatever it produces, so “output” and “quantity sold” are often used interchangeably. The chapter examines the details of problems that arise with the profit maximisation of a firm. They, then, derive a supply curve. The supply curve shows the levels of output that a firm chooses to produce at different market prices. Finally, students will study how to aggregate the supply curves of individual firms and obtain the market supply curve.

Important Questions Class 12 Microeconomics Chapter 4 – The Theory of the Firm under Perfect Competition, prepared by subject matter experts from the latest editions of CBSE (NCERT) books. These questions are available on the Extramarks website, and students can easily access them for better preparation for their upcoming exams.

CBSE Class 12 Microeconomics Chapter-4 Important Questions

Study Important Questions for Class 12 Economics Chapter 4 – The Theory of the Firm under Perfect Competition 

Students can access the Chapter 4 Class 12 Micro Economics Important Questions link to review the full set. They can also view the sample questions given below:

Very Short Answer Questions (1 or 2 Marks)

Q.1 Condition for producer equilibrium is 


b) MC=MR

c) None of above


Ans: (b) MC=MR

Q.2 Under which market situation demand curve is linear and parallel to X-axis? 

  1. a) Monopoly 
  2. b) Perfect competition 
  3. c) Oligopoly 
  4. d) Monopolistic competition 

Ans: (b) Perfect competition

Q.3 If, under perfect competition, the price lies below the average cost curve, the firm would? 

  1. a) Incur losses 
  2. b) Make abnormal profits 
  3. c) Make only normal profits 
  4. d) Profit cannot be determined 

Ans: (a) Incur losses

Q.4 A firm can sell as much as it wants at the market price. The situation is related to which of the following? 

a) Monopoly 

b) Monopolistic competition 

c) Perfect competition 

d) Oligopoly 

Ans: (c) Perfect competition

Q.5 What are the conditions for the long-run equilibrium of the competitive firm? 

a) P=MR



d) All of the above

Ans: (b) LMC=LAC=P

Q.6 Globalisation has made the Indian Market as which of the following? 

a) Buyer market 

b) Monopsony market 

c) Seller market 

d) Monopoly market 

Ans: (a) Buyer market

Q.7 When AR=Rs.10 and AC= Rs. 8, the firm makes 

a) Gross profit 

b) Normal profit 

c) Net profit 

d) Supernormal profit 

Ans: (d) Supernormal profit

Q.8 A competitive firm in the short run incurs losses. The firm continues production, if: 

a) P>AVC

b) P=AVC

c) P⩾AVC

d) P<AVC

Ans: (c) P≥AVC

Q.9 Define perfect competition. 

Ans: A market with perfect competition has a large number of customers and sellers selling the same product at the same price.

Q.10 Define Monopoly. 

Ans: A monopoly is a market arrangement in which a single supplier has complete price control.

Q.11 What is the shape of the marginal revenue curve under a monopoly? 

Ans: In a monopoly market, the marginal revenue curve slopes downhill from left to right and is lower than the average revenue curve.

Q.12 What is oligopoly? 

Ans: A market structure characterised by a small number of significant sellers who sell either homogeneous or differentiated commodities are defined as an oligopoly.

Q.13 What is product differentiation? 

Ans: It is the practice of differentiating products and services on various criteria, such as style, appearance, label, colour, size, packaging, brand name, and so on, with the goal of making them more appealing and superior to competitors’ products or services.

Q.14 What is the break–even price? 

Ans: The break-even price in a completely competitive market is the price at which a firm earns normal profit (Price =AC ). In the long run, the break-even price is the point at which P=AR=MC.

Short Answer Questions – 3 or 4 Marks

Q.1 Explain the implication of a firm’s free entry and exit in a perfectly competitive market

Ans: No firm can achieve an extraordinary profit in the long run if firms can freely enter and exit. That is because there is no extraordinary profit in the case of free entry and exit, each company earns a standard profit. There are many buyers and sellers in perfect competition.

‘Free Entry’ means that there are no barriers to new firms entering the market. When existing businesses make abnormal profits, new firms are influenced by the profit and enter the industry. This increases market supply, causing market prices and profits to fall.

‘Freedom to exit’ means that there are no barriers preventing existing firms from exiting the market. When they are losing money, the companies try to quit. As firms begin to exit, market supply decreases, causing market prices to rise and, as a result, losses to decrease. The firms do not stop leaving until the losses are eliminated and each remaining firm earns only normal profits.

Q.2 Which features of monopolistic competition are monopolistic in nature? 

Ans: Monopolistic competition describes a market situation in which a large number of firms sell products that are similar but distinct. The following are the characteristics of monopolistic competition:

A large number of sellers: There are a large number of businesses selling related but not identical products. Each company operates on its own and has a small market share. As a result, a single firm has only limited market price control. Market competition is created by the presence of a large number of businesses.

Product Differentiation: Despite a large number of sellers, each firm can maintain some monopoly power through product differentiation. The process of distinguishing products based on their brand, size, colour, shape, and so on is known as product differentiation. A firm’s product is a close but not perfect substitute for the product of another firm.

Selling costs: In monopolistic competition, products are differentiated, and these differences are communicated to buyers through selling costs. Selling costs are the expenses incurred for marketing, sales promotion, and product advertisement.

Freedom of entry & exit: Under monopolistic competition, firms have the freedom to enter and exit the industry at any time. It ensures that a company does not experience abnormal profits or losses over time.

Lack of perfect knowledge: Buyers and sellers do not have a complete understanding of market conditions due to a lack of perfect knowledge. In the minds of consumers, selling costs create an artificial superiority, making it difficult for them to evaluate different products on the market. As a result, even if other, less expensive products of equal quality are available, consumers still prefer a particular product.

Q.3 Why is the demand curve in monopolistically competitive firms likely to be very elastic? 

Ans: In monopolistically competitive firms, the demand curve is likely to be very elastic. This is due to the fact that the products produced by monopolistically competitive enterprises are nearly identical, and the firms have less price control. If the items are close substitutes for one another and the product is not sufficiently differentiated, the elasticity of demand increases, making the firm’s demand curve very elastic.

Long Answer Questions (5 or 6 Marks)

Q.1 Explain the conditions of a producer’s equilibrium in terms of Marginal Cost and Marginal Revenue.

Ans: The term “producer’s equilibrium” refers to a situation in which a producer produces the most output while earning the most money. It is a profitable situation. The producer will only reach equilibrium at the level of production under the MR-MC technique if the following conditions are met.

  • MR = MC
  • After MR = MC, MC must rise.
  • At the point of equilibrium, the MC curve must cut the MR curve from below.

The addition to TR from the sale of one additional unit of output is denoted by MR, and the addition to TC is denoted by MC. Firms compare their MR with their MC in order to maximise earnings.

In the diagram, the output is indicated on the X-axis, while revenue and cost are shown on the Y-axis. The MC curve is U-shaped, and P∼MR=AR is a horizontal line parallel to the X-axis.

When the output level is higher than OQ, MR < MC, which implies that the firm is making a loss on its last unit of output. Hence, so as to maximize profit, a rational producer will keep decreasing its output as long as MC >MR. Thus, the firm moves towards producing OQ units of output.

FAQs (Frequently Asked Questions)

1. What is the ‘price line’?

A price line or a budget line represents the various combinations and possible quantities of two goods that can be purchased with a given income and assumed prices.

2. What conditions must hold if a profit-maximising firm produces positive output in a competitive market?

The following conditions must be fulfilled:

  1. Marginal cost should be equal to that of marginal revenue. In other words MC=MR at equilibrium output.
  2. Marginal cost should rise above the marginal revenue after exceeding the equilibrium output level.
  3. The price should be greater than or equal to the average variable cost at the equilibrium output level (AVC) in the short run
  4. The price should be greater than or equal to the average cost at the equilibrium output level in long run.