In the short run, a perfectly competitive firm should keep producing as long as …

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Question restatement: In the short run, a perfectly competitive firm should keep producing as long as …

First, consider the core idea: in the short run, a firm should continue operating as long as it covers its variable costs, because fixed costs are sunk in the short run and must be paid regardless of production.

Option analysis (based on the provided correct answer): its total revenues are greater than its variable costs. This condition means TR > VC, which implies the price times quantity (P × Q) covers at least the variable costs, leaving some or all of the fixed costs unpaid but not adding losses beyond those fixed costs. If TR < VC, the firm would minimize losses by shutting down because the revenue would not cover variable costs, and continuing production would increase losses by the amount of the unsatisfied VC.

To connect to the standard economic logic: in perfect competition, the firm is a price taker, so its revenue is P × Q. Variable costs depend on output, so as long as producing one more unit adds more to revenue than it adds to variable cost (i.e., marginal revenue ≥ marginal cost for the range where price ≥ AVC), the firm should produce. If revenue fails to cover variable costs (TR < VC), producing would reduce overall contribution to fixed costs and deepen losses. If TR equals VC, the firm just covers its variable costs and contributes nothing toward fixed costs, which is a shutdown threshold in many formulations.

From a practical perspective, interpreting the statement "its total revenues are greater than its variable costs" as the production rule in the short run is consistent with the shutdown decision rule: operate if TR ≥ VC, shut down if TR < VC. The reasoning hinges on the distinction between fixed and variable costs and the role of price as a signal of whether production is covering the costs that depend on output.

Note on missing options: since no other answer choices are provided to compare, this analysis focuses on the standard criterion for short-run production in perfect competition: produce when TR ≥ VC and stop when TR < VC. The intuition remains that fixed costs are sunk in the short run, so they do not affect the decision to produce in the immediate period, whereas variable costs do.

ECON 2010-090 Summer 2025 Econ 2010 Final Exam Summer 2025

In the short run, a perfectly competitive firm should keep producing as long as …

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ECON 2010-090 Summer 2025 Econ 2010 Final Exam Summer 2025

In the short run, a perfectly competitive firm should keep producing as long as …

View Explanation

Log in for full answers

Similar Questions

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