Which one of the following statements for a firm's equilibrium in Perfect Competition is not correct? (a) The market price must be greater or equal to average variable cost in the short run. (b) The market price must be equal to marginal cost. (c) The market price must be equal to average cost in the long run. (d) The marginal cost decreases at the equilibrium output.

In perfect competition, a profit-maximizing firm's equilibrium is defined by three specific conditions. First, the market price must equal marginal cost (P = MC) [3]. Second, for the firm to continue production, the price must be greater than or equal to the average variable cost (P ≥ AVC) in the short run to avoid the shutdown point [1]. Third, in the long run, free entry and exit ensure that the market price equals the minimum average cost (P = min AC), resulting in zero economic profit [3]. The incorrect statement is that marginal cost decreases at equilibrium. For profit maximization, the marginal cost must be non-decreasing (upward-sloping) at the equilibrium output level [3]. If MC were decreasing, the firm could increase profit by producing more, as the cost of the next unit would be lower than the price received.

Sources

1. [3] Microeconomics (NCERT class XII 2025 ed.) > Chapter 4: The Theory of the Firm under Perfect Competition > 4.3 PROFIT MAXIMISATION > p. 56
2. [1] Microeconomics (NCERT class XII 2025 ed.) > Chapter 4: The Theory of the Firm under Perfect Competition > 4.3.3 Condition 3 > p. 58
3. [2] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > 5.1.2 Market Equilibrium: Free Entry and Exit > p. 81