Class 12 Microeconomics Chapter 4 Important Questions – The Theory of the Firm Under Perfect Competition
The Theory of the Firm under Perfect Competition explains how a price-taking firm chooses its profit-maximising output. It covers revenue, profit, short-run and long-run supply, shutdown decisions and price elasticity of supply.
A perfectly competitive firm accepts the market price and decides how much output to produce. It compares marginal revenue with marginal cost and produces only when the required cost conditions are satisfied.
Use these Class 12 Microeconomics Chapter 4 Important Questions to practise the current NCERT concepts for 2026–27. The questions cover perfect competition, revenue, profit maximisation, supply curves, market supply and price elasticity of supply.
Key Takeaways
- Price-taking firm: A competitive firm accepts the market price.
- Revenue relation: For a price-taking firm, AR = MR = Price.
- Profit maximisation: The firm produces where Price = MC and MC is rising.
- Supply decision: The short-run supply curve begins from minimum AVC.
Access Class 12 Microeconomics Chapter 4 Important Questions in 30 Minutes
Revise the chapter in three parts:
- First 10 minutes: Perfect competition, price-taking behaviour, TR, AR and MR
- Next 10 minutes: Profit maximisation, shutdown point and break-even point
- Final 10 minutes: Supply curves, market supply and price elasticity of supply
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Very Short Answer Questions – 1 or 2 Marks
These questions cover the main definitions and conditions from the chapter.
Q1. Define perfect competition.
Answer: Perfect competition is a market structure with many buyers and sellers, homogeneous products, free entry and exit, and perfect information.
Q2. What is a price taker firm?
Answer: A price taker firm accepts the market price because it cannot influence that price through its individual output decision.
Q3. State the formula for total revenue.
Answer:
TR = Price × Quantity
TR = p × q
Q4. Define average revenue.
Answer: Average revenue is the revenue earned per unit of output.
AR = TR/q
Q5. Define marginal revenue.
Answer: Marginal revenue is the addition to total revenue from selling one more unit of output.
MR = Change in TR/Change in quantity
Q6. State the relationship between price, AR and MR under perfect competition.
Answer:
Price = AR = MR
Q7. Why is the demand curve of a competitive firm perfectly elastic?
Answer: A competitive firm can sell any quantity at the market price but nothing at a higher price. Therefore, its demand curve is horizontal.
Q8. Define profit.
Answer: Profit is the difference between total revenue and total cost.
Profit = TR − TC
Q9. What is normal profit?
Answer: Normal profit is the minimum profit required to keep an entrepreneur in the existing business.
Q10. What is supernormal profit?
Answer: Supernormal profit is the profit earned over and above normal profit.
Q11. State the first condition of profit maximisation.
Answer: Marginal revenue must equal marginal cost.
MR = MC
Under perfect competition:
Price = MC
Q12. What is the shutdown point?
Answer: The short-run shutdown point is the minimum point of the AVC curve where SMC cuts AVC.
Q13. What is the break-even point?
Answer: The break-even point is the point where price equals average cost and the firm earns only normal profit.
Price = AC
Q14. What is the short-run supply curve of a firm?
Answer: It is the rising part of the SMC curve from and above minimum AVC.
Q15. What is the long-run supply curve of a firm?
Answer: It is the rising part of the LRMC curve from and above minimum LRAC.
Short Answer Questions – 3 or 4 Marks
These questions test the relationships among market price, revenue, costs and supply.
Q16. Explain the defining features of perfect competition.
Answer:
A perfectly competitive market has four main features:
- Large number of buyers and sellers: No individual participant can influence market price.
- Homogeneous product: Every firm sells an identical product.
- Free entry and exit: Firms can enter or leave the market without barriers.
- Perfect information: Buyers and sellers know the price, quality and other market details.
These features create price-taking behaviour.
Q17. Why is a firm under perfect competition a price taker?
Answer:
A competitive firm is very small compared with the whole market. Its individual supply cannot influence total market supply.
All firms sell a homogeneous product, and buyers know the market price. A firm charging more than the market price loses its buyers.
Therefore, the firm accepts the price determined by the market.
Q18. Explain why AR and MR equal the market price under perfect competition.
Answer:
Total revenue is:
TR = p × q
Average revenue is:
AR = TR/q
AR = pq/q = p
When output rises by one unit, the extra unit is sold at the same market price.
Therefore:
MR = p
Hence:
AR = MR = Price
Q19. State the conditions for profit maximisation.
Answer:
A competitive firm maximises profit at a positive output when:
- Price equals marginal cost.
- Marginal cost is non-decreasing.
- In the short run, Price ≥ AVC.
- In the long run, Price ≥ AC.
The second condition ensures that MC cuts the price line from below.
Q20. Will a competitive firm produce when price is below AVC in the short run?
Answer:
No. When price is below average variable cost, total revenue cannot cover total variable cost.
The firm loses more by producing than by shutting down. At zero output, it bears only fixed cost.
Therefore, it produces zero output when:
Price < Minimum AVC
Q21. Will a competitive firm produce when price is below AC in the long run?
Answer:
No. In the long run, all costs are variable.
If price is below average cost, total revenue is lower than total cost. The firm incurs a loss.
Since it can exit in the long run, it produces zero output when:
Price < Minimum LRAC
Q22. How does technological progress affect a firm’s supply curve?
Answer:
Technological progress allows a firm to produce the same output with fewer inputs.
This lowers marginal cost at each output level. The MC curve shifts downward or rightwards.
Since the supply curve is part of the MC curve, the firm’s supply curve also shifts to the right.
Q23. How does an increase in input price affect a firm’s supply curve?
Answer:
An increase in input price raises the cost of production.
Marginal cost increases at every output level. The MC curve shifts upwards or to the left.
Therefore, the firm supplies less output at every market price.
Q24. How does a unit tax affect the supply curve?
Answer:
A unit tax is imposed on each unit sold.
It raises marginal cost and average cost by the amount of the tax. The MC and AC curves shift upwards.
As a result, the firm’s supply curve shifts to the left.
Q25. How is the market supply curve derived?
Answer:
The market supply curve is obtained by horizontally adding the supply curves of all firms.
At each price:
Market supply = Supply of Firm 1 + Supply of Firm 2 + ... + Supply of Firm n
An increase in the number of firms shifts the market supply curve to the right.
Long Answer Questions – 5 or 6 Marks
These questions require explanation through cost and revenue relationships.
Q26. Explain producer equilibrium under perfect competition.
Answer:
Producer equilibrium refers to the output level at which a firm earns maximum profit.
The firm compares marginal revenue with marginal cost.
When MR > MC, producing an additional unit adds more to revenue than cost. Profit rises.
When MR < MC, the additional unit adds more to cost than revenue. Profit falls.
Therefore, the first condition is:
MR = MC
Under perfect competition:
MR = Price
Hence:
Price = MC
The second condition is that MC must be rising at the equilibrium output. The MC curve must cut the MR or price line from below.
The firm must also satisfy the production condition:
- Short run: Price ≥ AVC
- Long run: Price ≥ AC
Q27. Explain the short-run supply curve of a competitive firm.
Answer:
The short-run supply curve shows the output a firm produces at different prices.
When the market price is equal to or above minimum AVC, the firm selects the output where:
Price = SMC
The SMC curve must be rising at that point.
When price falls below minimum AVC, the firm cannot cover its variable cost. It shuts down and produces zero output.
Therefore, the short-run supply curve consists of:
- The rising part of SMC from and above minimum AVC
- Zero output at all prices below minimum AVC
Q28. Explain the long-run supply curve of a competitive firm.
Answer:
In the long run, the firm produces where:
Price = LRMC
The LRMC curve must be rising at the selected output.
The firm also needs price to be equal to or greater than LRAC. If price falls below minimum LRAC, the firm cannot cover its total cost.
It exits and produces zero output.
Therefore, the long-run supply curve consists of:
- The rising part of LRMC from and above minimum LRAC
- Zero output at prices below minimum LRAC
Q29. Distinguish between shutdown point and break-even point.
Answer:
| Basis | Shutdown Point | Break-even Point |
| Meaning | Lowest price at which the firm produces in the short run | Price at which the firm earns normal profit |
| Cost condition | Price = Minimum AVC | Price = Minimum AC |
| Profit position | Firm may incur loss equal to fixed cost | Firm earns normal profit |
| Production decision | Firm shuts down below this point | Firm continues production |
| Relevant period | Mainly short run | Short run and long run |
The shutdown point is lower than the break-even point because AVC is lower than AC.
Q30. Explain the determinants of a firm’s supply curve.
Answer:
A firm’s supply curve depends on factors affecting marginal cost.
Technological progress
Better technology lowers input use and marginal cost. The supply curve shifts rightwards.
Input prices
Higher input prices raise marginal cost. The supply curve shifts leftwards.
Unit tax
A unit tax raises the cost of every unit produced. The supply curve shifts leftwards.
A reduction in costs has the opposite effect and increases supply.
Numerical Questions
These questions test revenue, profit, market supply and elasticity calculations.
Q31. A firm sells its product at ₹10 per unit. Calculate TR, AR and MR for outputs from 1 to 5 units.
Answer:
| Output | TR | AR | MR |
| 1 | ₹10 | ₹10 | ₹10 |
| 2 | ₹20 | ₹10 | ₹10 |
| 3 | ₹30 | ₹10 | ₹10 |
| 4 | ₹40 | ₹10 | ₹10 |
| 5 | ₹50 | ₹10 | ₹10 |
Therefore:
AR = MR = Price = ₹10
Q32. Calculate profit from the following information: TR = ₹30 and TC = ₹24.
Answer:
Profit = TR − TC
Profit = 30 − 24
Profit = ₹6
The firm earns a profit of ₹6.
Q33. Firm 1 supplies 5 units and Firm 2 supplies 3 units at a price of ₹8. Find market supply.
Answer:
Market supply = Supply of Firm 1 + Supply of Firm 2
Market supply = 5 + 3
Market supply = 8 units
Q34. A firm supplies 500 units at ₹5. Its elasticity of supply is 2. Find the new price when supply rises to 700 units.
Answer:
Price elasticity of supply:
eS = (Change in quantity/Initial quantity) ÷ (Change in price/Initial price)
2 = (200/500) ÷ (Change in price/5)
2 = 0.4 ÷ (Change in price/5)
Change in price/5 = 0.2
Change in price = ₹1
New price = ₹5 + ₹1
New price = ₹6
Q35. The price of a commodity rises from ₹10 to ₹11. Quantity supplied rises by 100 units. Elasticity of supply is 2. Find the initial and new quantity.
Answer:
eS = (Change in quantity/Initial quantity) ÷ (Change in price/Initial price)
2 = (100/Q) ÷ (1/10)
2 = 1,000/Q
Q = 500 units
New quantity = 500 + 100
Initial quantity = 500 units
New quantity = 600 units
Useful Links for Class 12 Micro Economics Important Questions
| Section | Useful Links |
| Important Questions | Important Questions Class 12 Micro Economics |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 1 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 2 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 3 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 5 |
| Economics Important Questions | Important Questions Class 12 Economics |
| CBSE Important Questions | CBSE Important Questions |
FAQs (Frequently Asked Questions)
The firm accepts the market price and can sell any quantity at that price. It cannot sell at a higher price because buyers can purchase the identical product elsewhere.
MR may equal MC where MC is falling. At that point, profit is not maximum. MC must cut MR from below and rise after the equilibrium output.
A firm can continue if price covers average variable cost. Its revenue then covers variable cost and part of fixed cost. It shuts down only when price falls below minimum AVC.
The firm chooses output where price equals marginal cost. As price changes, the corresponding output is found on the rising part of the MC curve.
A straight supply curve cutting the price axis has elasticity greater than one. A curve through the origin has unit elasticity. A curve cutting the quantity axis has elasticity below one.