In a perfectly competitive firm, the market price is Rs 60, output is 300 units, average variable cost is Rs 18, and average total cost is Rs 36. What is the total profit earned by the firm on this output level?

Introduction / Context:
This question tests a very important application of cost and revenue concepts in microeconomics. In particular, it focuses on how to compute total profit for a perfectly competitive firm when you are given the market price, quantity produced, average variable cost, and average total cost. Understanding how average costs relate to total cost and profit is essential for solving numerical questions on firm behaviour and profit maximisation in competitive markets.

Given Data / Assumptions:

• The firm operates in a perfectly competitive market, so it is a price taker.
• Market price (P) = Rs 60 per unit.
• Output level (Q) = 300 units.
• Average variable cost (AVC) = Rs 18 per unit.
• Average total cost (ATC) = Rs 36 per unit.
• We assume that ATC already includes both average fixed cost and average variable cost, and that all units are sold at the given price.

Concept / Approach:
Profit in economics is defined as total revenue minus total cost. For a given output level, total revenue is price multiplied by quantity, and total cost is average total cost multiplied by quantity. Although average variable cost is given, it is not needed directly for profit here because average total cost already captures the full cost per unit. The key idea is therefore to convert averages into totals and then subtract total cost from total revenue. Alternatively, you can use the shortcut formula profit = (price minus average total cost) multiplied by quantity.

Step-by-Step Solution:
Step 1: Compute total revenue (TR). TR = P * Q = 60 * 300 = Rs 18000.Step 2: Compute total cost (TC). TC = ATC * Q = 36 * 300 = Rs 10800.Step 3: Compute profit using the basic formula. Profit = TR - TC = 18000 - 10800 = Rs 7200.Step 4: Cross check using the shortcut. Profit per unit = P - ATC = 60 - 36 = Rs 24 per unit. Multiply by Q: 24 * 300 = 7200, which confirms the earlier result.Step 5: Match the computed profit with the options and select Rs 7200.

Verification / Alternative check:
You can also verify consistency using the relationship between average costs. Average fixed cost is ATC minus AVC, which here is 36 - 18 = Rs 18 per unit. This means total fixed cost is 18 * 300 = Rs 5400 and total variable cost is AVC * Q = 18 * 300 = Rs 5400, so total cost is 5400 + 5400 = Rs 10800. Substituting into the profit formula gives profit = 18000 - 10800 = Rs 7200 again. Both methods lead to the same result, so the calculation is internally consistent.

Why Other Options Are Wrong:
Rs. 5400: This equals either total fixed cost or total variable cost, not the profit. It comes from 18 * 300 but ignores revenue.

Rs. 3600: This number does not correspond to any standard combination of cost and revenue in the given data and is therefore incorrect.

Rs. 1800: This is far smaller than the profit per unit times quantity and has no clear economic basis here.

Common Pitfalls:
Many learners mistakenly use average variable cost instead of average total cost when computing profit, which leads to an overstatement of profit because fixed costs are ignored. Another frequent error is to forget that profit is total revenue minus total cost and instead subtract costs per unit without scaling by quantity. By remembering the simple formulas for TR, TC, and profit, and by carefully distinguishing between AVC and ATC, you can avoid these mistakes in exam questions and real world applications.

Final Answer:
The total profit earned by the firm at this output level is Rs 7200.