Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Read the statements and choose the correct answer. Assertion (A) There exists excess capacity of the production for the firms if these incur losses. Reason (R) Their production level has to remain below their economic capacity level.

The correct answer is: C. Both (A) and (R) are correct and (R) is the right explanation of (A).

Explanation:

Assertion (A) is correct because if a firm is incurring losses, it means that its revenue is less than its costs. This implies that the firm is not producing at its optimal level, where marginal revenue equals marginal cost. In other words, the firm is producing below its economic capacity level.

Reason (R) is also correct because if a firm is producing below its economic capacity level, it means that it has excess capacity. Excess capacity is the difference between a firm’s economic capacity and its actual production level.

Therefore, both (A) and (R) are correct and (R) is the right explanation of (A).