The Theory of the Firm under Perfect CompetitionClass 12 Introductory Microeconomics Case Study Questions

Kisan AgriFarms operates in a perfectly competitive market for wheat. There are thousands of similar farms, each producing an identical, homogenous product. Market information is perfect, and the prevailing market price for wheat is Rs 20 per kg. The owner of Kisan AgriFarms knows that if he tries to sell his wheat at Rs 21 per kg, he will lose all his customers to other farms. Conversely, he has no incentive to sell for less than Rs 20, as he can sell his entire harvest at the current market price. Therefore, the farm accepts the market price of Rs 20 as given. For this farm, the total revenue is simply the market price multiplied by the quantity sold. The demand curve it faces is not the downward-sloping market demand curve, but a horizontal line at the market price.

A competitive firm, 'Radiant Candles', produces boxes of candles. The market price for a box of candles is Rs 15. The firm's owner has compiled a schedule of the total cost (TC) of production for different output levels. The firm's objective is to maximise its profit, which is the difference between total revenue (TR) and total cost (TC). The firm has a fixed cost even at zero output.

A small toy car factory operates in a perfectly competitive market. The market price (p) for a toy car has dropped to Rs 20. The factory's cost structure is such that at its potential profit-maximising output level (where p = SMC), which is 50 units, its Short-Run Marginal Cost (SMC) is Rs 20. However, at this output level, its Average Variable Cost (AVC) is Rs 25, and its Average Fixed Cost (AFC) is Rs 10. The manager must decide whether to continue producing 50 units or to shut down production temporarily. If the factory shuts down, it produces zero output but must still pay its total fixed costs.