NCERT Solutions for Class 12 Economics Introductory Microeconomics Chapter 4

The Theory of The Firm Under Perfect Competition Class 12

Chapter 4 The Theory of The Firm Under Perfect Competition Exercise Solutions

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Exercise : Solutions of Questions on Page Number : 66

Q1 :  

What are the characteristics of a perfectly competitive market?


Answer :

Perfect Competition

This type of market structure refers to the market that consists of a large number of buyers and also a large number of sellers. No individual seller is able to influence the price of an existing product in the market. All sellers in a perfect competition produce homogenous outputs, i.e. the outputs of all the sellers are similar to each other and the products are uniformly priced.

Features of Perfectly Competitive Market

1) A large number of buyers and sellers

There exist a large number of buyers and sellers in a perfectly competitive market. The number of sellers is so large that no individual firm owns the control over the market price of a commodity.

Due to the large number of sellers in the market, there exists a perfect and free competition. A firm acts as a price taker while the price is determined by the 'invisible hands of market', i.e. by 'demand for' and 'supply of' goods. Thus, we can conclude that under perfectly competitive market, an individual firm is a price taker and not a price maker.

2) Homogenous products

All the firms in a perfectly competitive market produce homogeneous products. This implies that the output of each firm is perfect substitute to others' output in terms of quantity, quality, colour, size, features, etc. This indicates that the buyers are indifferent to the output of different firms. Due to the homogenous nature of products, existence of uniform price is guaranteed.

3) Free exit and entry of firms

In the long run there is free entry and exit of firms. However, in the short run some fixed factors obstruct the free entry and exit of firms. This ensures that all the firms in the long-run earn normal profit or zero economic profit that measures the opportunity cost of the firms either to continue production or to shut down. If there are abnormal profits, new firms will enter the market and if there are abnormal losses, a few existing firms will exit the market.

4) Perfect knowledge among buyers and sellers

Both buyers and sellers are fully aware of the market conditions, such as price of a product at different places. The sellers are also aware of the prices at which the buyers are willing to buy the product. The implication of this feature is that if any individual firm is charging higher (or lower) price for a homogeneous product, the buyers will shift their purchase to other firms (or shift their purchase from the firm to other firms selling at lower price).

5) No transport costs

This feature means that all the firms have equal access to the market. The goods are produced and sold locally. Therefore, there is no cost of transporting the product from one part of the market to other.

6) Perfect mobility of factors of production

There exists geographically and occupationally perfect mobility of factors of production. This implies that the factors of production can move from one place to other and can move from one job to another.

7) No promotional and selling costs

There are no advertisements and promotional costs incurred by the firms. The selling costs under perfectly competitive market are zero.

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Q2 :  

How are the total revenue of a firm, market price, and the quantity sold by that firm related to each other?


Answer :

Total revenue is defined as the total sales proceeds of a producer by selling corresponding level of output. In other words, it is defined as price times the quantity of output sold.

Total Revenue = Price x Quantity of output sold

TR = P x Q

TR = PQ

In a perfectly competitive market, the market price is given, i.e., a firm acts as a price taker and cannot influence the price. Hence, a particular firm can influence its TR by altering the quantity of output sold.

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Q3 :  

What is the price line?


Answer :

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Q4 :  

Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?


Answer :

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Q5 :  

What is the relation between market price and average revenue of a price taking firm?


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Q6 :  

What is the relation between market price and marginal revenue of a price-taking firm?


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Q7 :  

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


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Q8 :  

Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.


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Q9 :  

Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.


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Q10 :  

Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC?


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Q11 :  

Will a profit-maximising firm in a competitive market produce a positive level of output in the long run if the market price is less than the minimum of AC? Give an explanation.


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Q12 :  

What is the supply curve of a firm in the short run?


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Q13 :  

What is the supply curve of a firm in the long run?


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Q14 :  

How does technological progress affect the supply curve of a firm?


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Q15 :  

How does the imposition of a unit tax affect the supply curve of a firm?


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Q16 :  

How does an increase in the price of an input affect the supply curve of a firm?


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Q17 :  

How does an increase in the number of firms in a market affect the market supply curve?


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Q18 :  

What does the price elasticity of supply mean? How do we measure it?


Answer :

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Q19 :  

Calculate the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.

Quantity Sold

TR

MR

AR

0

     

1

     

2

     

3

     

4

     

5

     

6

     


Answer :

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Q20 :  

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.

Quantity Sold

TR (Rs )

TC (Rs )

Profit

0

0

5

 

1

5

7

 

2

10

10

 

3

15

12

 

4

20

15

 

5

25

23

 

6

30

33

 

7

35

40

 


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Q21 :  

The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is Rs 10. Calculate the profit at each output level. Find the profit maximising the level of output.

Quantity Sold

TC (Rs )

0

5

1

15

2

22

3

27

4

31

5

38

6

49

7

63

8

81

9

101

10

123


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Q22 :  

Consider a market with two firms. The following table shows supply schedules of two firms: SS1 denotes the supply schedule of firm 1 and SS2 denotes the supply schedule of firm 2. Calculate the market supply schedule.

Price (Rs )

SS1 (units)

SS2 (units)

0

0

0

1

0

0

2

0

0

3

1

1

4

2

2

5

3

3

6

4

4


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Q23 :  

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.

Price (Rs )

SS1 (kg)

SS2 (kg)

0

0

0

1

0

0

2

0

0

3

1

0

4

2

0.5

5

3

1

6

4

1.5

7

5

2

8

6

2.5


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Q24 :  

There are three identical firms in a market. The following table shows the supply schedule of firm 1. Calculate the market supply schedule.

Price (Rs )

SS1 (units)

0

0

1

0

2

2

3

4

4

6

5

8

6

10

7

12

8

14


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Q25 :  

A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increase to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm's supply curve?


Answer :

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Q26 :  

The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm's supply curve is 0.5. Find the initial and final output levels of the firm.


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Q27 :  

At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 30. The price elasticity of the firm's supply is 1.25. What quantity will the firm supply at the new price?


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<< Previous Chapter 3 : Production and Costs Next Chapter 5 : Market Equilibrium >>

Introductory Microeconomics - Economics : CBSE NCERT Exercise Solutions for Class 12th for The Theory of The Firm Under Perfect Competition will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.

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