Reason Based & Extra Questions - Producer Equilibrium - Commerce PDF Download

Reason Based Question’s

(Q1) Production  should be discontinued when AR = AVC ?
Ans: F , Not necessarily

(Q2) At the state of producer’s equilibrium marginal cost of the firm should be rising.      Ans: T

(Q3) If marginal cost is equal to marginal revenue at two output levels, then any one of the output level can be taken as state of producer’s equilibrium.

Ans: False.  Only that output level is the state of producer’s equilibrium when marginal cost becomes greater than marginal revenue after the equilibrium.

(Q4) Excess of marginal revenue over marginal cost is always better than equality between the two in order to achieve the equilibrium for a producer.

Ans: False,  as it will be possible to increase profits by producing more.  So, equality between MR and MC is a better situation.

(Q5) Producer’s equilibrium is a situation of ‘revenue maximisation’.
Ans: F 

(Q6) In the long run, a firm must cover all costs of production.

Ans: True ,  Because, in the long run, all costs are variable costs.

(Q7) Shut-down point means shutting down the firm.

Ans: No , shut-down point occurs when a firm just covers its variable cost ( TR = TVC ) 

(Q8) Production should be discontinued when AR = AVC ?

Ans: Not necessarily.  When AR = AVC, the firm is incurring the loss of fixed costs. The producer, therefore, may or may not discontinue production  as it is shut down point

(Q9) The general rule of pricing under monopoly is P  > MC where as under perfect competition it is P= MC .
Ans:  T

(Q10) A producer  focusing on profit maximisation  strikes an equilibrium in a state of increasing returns.
Ans: F

(Q11) MR = MC is a sufficient condition for producer’s equilibrium.        
Ans: F

(Q12)  A producer attains his equilibrium in the first stage of production.    
Ans:  F

(Q13)  A firm sells 5 units of the output at the price of Rs. 40 per unit.  The cost of producing that quantity of output is Rs. 180.  The firm is earning normal profits in this situation.
Ans: F

(Q14)  Equilibrium always refers to a situation when profits are maximized.
Ans: F 

EXTRA QUESTION’S

(Q1) A firm  can deviate from MR = MC rule ?

Ans: Yes, if the firm has some other objective to achieve , other than profit maximisation.

(Q2) If an operational firm gets confronted with absolute dismal market should it close down and not suffer any loss

Ans: Yes ,it should close down . But it cannot avoid losses.  It will lose its fixed cost.

(Q3)  As an owner of an enterprise, you find that per unit overhead (fixed) cost is continuously falling as output is increased.   Does it show ever rising profits for your enterprises ?

Ans: No , It does not 

(a) With increase in output, variable cost will increase which may be more than decrease in peer unit fixed cost.

(b) It is not certain that total revenue from sale of output will remain more than total cost 

(Q4) Why should equilibrium not be struck when TR is maximum?

Ans: Equilibrium is struck not when TR is maximum.  Instead, it is struck when profit is maximized.  And, profit is maximized when the difference between TR and TC is maximized.  Or  equilibrium is struck when : MR = MC, and MC is rising.

(Q5) Why should MC curve cut MR curve from below to achieve producer’s equilibrium?

Ans: The idea is that beyond the point of equilibrium, the MC should be greater than MR so that further production becomes uneconomical.

(Q6)  The equality of marginal cost and marginal revenue is a condition necessary for equilibrium, for it is not by itself sufficient to assure the attainment of producer’s equilibrium, Comment.

Ans: The given statement is correct.   Another condition also needs to be fulfilled for the establishment of the firm’s equilibrium and that: ‘ MC must be greater than MR  after MC = MR output level ’.

(Q7 ) ‘Does Producer’s equilibrium indicate that he should stop further production’? Comment.

Ans: Yes , producer’s equilibrium indicates an ideal situation where MR = MC and MC cuts MR from below. It helps in determining an optimum level of output at a most suitable price. Firm will earn maximum possible profits in these circumstances.

(Q8) If average variable costs exceed the market price, what level of output should the firm  produce? What if there are no fixed costs ?            

Ans: Zero output.

(Q9) A seaside hotel has fixed cost of Rs. 10,000. During the winter it makes a loss, since in addition to its fixed costs it has variable costs of Rs. 50,000 per month whereas revenue from guests is only Rs. 51,000 per month. Should the hotel close down during the winter ? Give reasons.

Ans: Keep the hotel open.

(Q10) You are the owner of a firm that is currently losing Rs. 1,000 per month, with fixed costs per month of Rs. 800. A management consultant advises you to cease production. Should you accept the advice ? Why or why not ? 
Ans: Yes

(Q11) A firm in pure competition has a price of Rs. 7 per unit, an average cost of Rs. 7.50, average variable cost of Rs. 6.00, and a marginal cost of Rs. 6.75. Should this firm expand output, contract output, or shut-down in the short-run ?    

Ans:  The firm is earning losses

(Q12) Imagine yourself a producer (in a perfectly competitive market structure), focusing on profit maximisation. Will you prefer striking an equilibrium in a state of increasing returns?

Ans: Striking equilibrium in a state of increasing returns to a factor (when MP is rising or MC is falling) is absolutely ruled out. { explain adjustment mechanism }

(Q13) Using your judgement as an entrepreneur, would you agree with the following statement ?

“Maximisation of profit implies equilibrium, but equilibrium does not always imply maximisation of profit.”

Ans: Yes, we do agree . Profit is maximised when the difference between total revenue and total cost is maximum. But equilibrium can be struck even in the state of losses, when the two conditions are satisfied, i.e., (i) MR = MC and (ii) MC is rising.

Note : It is situation of low price prevailing in the market when the firm is covering variable cost, but not the total cost.

(Q14) A firm is contemplating to produce its 10th unit of output, and finds its marginal costs for the 10th unit are Rs. 50 and its marginal revenue for the 10th unit equals Rs. 30. What advice would you give to this firm ?

(Q15) At the quantity where MR equals MC, the following data apply :     

AFC = Rs. 8, AVC = Rs. 15, Price = Rs. 20 . 

Should the firm produce in the short-run or in the long-run ?

(Q16) You are the owner of a firm that is currently losing Rs. 1,000 per month, with fixed costs per month of Rs. 800. A management consultant advises you to cease production. Should you accept the advice ? Why or why not ? 

(Q17) A producer produces output at which

(a) TR - TC is  maximum   
(b) MC > MR beyond this level of output.

Is the given producer maximising profits ? Explain. Use diagram.

(Q18) Prove that for profit maximisation ?

(i) The market price (P) = MC
(ii) MC curve is non-decreasing.

(Q19) Mr. Rohit is a producer of TV sets and finds that his product’s total cost is equal to the total revenue collected by him. What is this term called ? Will he earn normal profit at this rate ? Explain.

(Q20) A farmer produces 10,000 tons of fruits and wants to store 5000 tons as stock to sell in future. What do you think he should do ? Explain.

(Q21) The rent paid by a producer is Rs. 100, wages paid by him is Rs. 200 and he produces 10 units of a particular product. He sold 10 units @ Rs. 2 each. Should he produce more at this stage or stop ?

(Q22) A producer attains equilibrium only when his product’s marginal revenue is equal to its marginal cost. Is it correct ?