When AR = Rs. 10 and AC = Rs. 8, the firm makes:
Options
ANormal profit
BNet profit
CGross profit
DSupernormal profit
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Price Determination in Different MarketsMTP - June 2023Question 74 of 20
All Questions Correct Answer
✅ Option d — Supernormal profit
All Options:
- ANormal profit
- BNet profit
- CGross profit
- DSupernormal profit
Detailed Solution & Explanation
To determine the type of profit the firm makes, we need to understand the concepts of Average Revenue (AR) and Average Cost (AC).
• The Average Revenue (AR) is the revenue earned per unit of output sold, which is given as Rs. 10.
• The Average Cost (AC) is the cost incurred per unit of output produced, which is given as Rs. 8.
• When AR is greater than AC, the firm makes a profit.
• The difference between AR and AC gives us the profit per unit, which is Rs. 10 - Rs. 8 = Rs. 2.
• Since the firm is earning more than its average cost, it is making a profit above the normal profit, which is the minimum profit required to keep the firm in business.
• This excess profit is known as supernormal profit, which occurs when a firm earns a return greater than the normal return.
The correct answer is supernormal profit because the firm is earning more than its average cost, indicating an excess profit.
Normal profit is incorrect because it refers to the minimum profit required to keep the firm in business, which is not the case here.
Gross profit is also incorrect because it refers to the difference between total revenue and total cost, not the profit per unit.
About This Chapter: Price Determination
Paper
Paper 4: Business Economics
Weightage
15%
Key Topics
Perfect Competition, Monopoly, Monopolistic, Oligopoly
This high-weightage chapter covers all four market structures: Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. Students learn how price and output are determined under each structure, along with key concepts like Price Discrimination, Kinked Demand Curve, and the conditions of equilibrium (MR = MC).
View Official ICAI SyllabusExam Strategy Tip
This chapter carries the highest weightage (~15%). Focus on features of each market, the shape of AR and MR curves, and understand why firms in Perfect Competition are 'Price Takers' while Monopolists are 'Price Makers'.
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More Questions from Price Determination in Different Markets
Under which of the following forms of market structure does a firm have no control over the price of its product?
A firm encounters its "shutdown point" when:
Kinked demand curve hypothesis is designed to explain in context of oligopoly
Which of the following is not a characteristic of a "Price Taker"?
Price discrimination will be profitable only if the elasticity of demand in different markets is:
Which of the following is not an essential condition of pure competition?
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