In the short run, when a profit-maximizing, perfectly competitive firm is producing at the quantity where MR = MC and the firm’s total revenue is less than its total variable cost, the firm should

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In the short run, when a profit-maximizing, perfectly competitive firm is producing at the quantity where  MR = MC and the firm’s total revenue is less than its total variable cost, the firm should

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Question restatement: In the short run, for a profit-maximizing, perfectly competitive firm producing at MR = MC, if total revenue is less than total variable cost, what should the firm do?

Option 1: lower its price. In perfect competition, the firm faces a perfectly elastic demand, so it cannot lower price and still keep MR = P; lowering price would reduce price without changing MC in the MR = MC condition, leading to lower profit or higher losses, and it does not address the condition TR < TVC. This option ignores the incentive to shut down when producing would incur variable losses.

Option 2: expect other firms to enter the industry. In the short run for a perfectly competitive firm, entry affects long-run supply, not the immediate decision when MR = MC and TR < TVC. Since the scenario is about the firm’s current production decision, this option misreads the time frame and the impact of entry on current costs and revenue.

Option 3: continue to produce the same quantity. If TR < TVC at the current output, the firm is incurring losses that exceed its fixed costs. Since fixed costs are sunk in the short run, the firm should not continue producing at a loss that does not cover variable costs; continuing production would worsen losses relative to shutting down.

Option 4: raise its price. A perfectly competitive firm cannot raise price without losing all its sales because it is a price taker; it cannot influence market price by changing its own output. Therefore this option is infeasible in this market structure and does not resolve the condition TR < TVC.

Option 5: shut down. The shutdown decision in the short run is based on whether price covers average variable cost (P ≥ AVC). When TR < TVC at MR = MC, the firm’s revenue does not cover its variable costs, meaning it would minimize losses by ceasing production and incurring only fixed costs. This aligns with standard short-run shutdown logic for competitive firms.

Summary of reasoning: The core idea is that, in the short run, a firm should continue producing only if it can cover its variable costs (TR ≥ TVC). If not, producing would incur larger losses than shutting down, so the rational move is to shut down. The other options either misinterpret market structure constraints (price setting) or ignore the cost coverage condition, or rely on effects (entry) that do not affect the immediate shutdown decision.

AP Economics-Hillebrand Unit 3 Exam (2025) v1- Requires Respondus LockDown Browser

In the short run, when a profit-maximizing, perfectly competitive firm is producing at the quantity where MR = MC and the firm’s total revenue is less than its total variable cost, the firm should

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AP Economics-Hillebrand Unit 3 Exam (2025) v1- Requires Respondus LockDown Browser

In the short run, when a profit-maximizing, perfectly competitive firm is producing at the quantity where MR = MC and the firm’s total revenue is less than its total variable cost, the firm should

View Explanation

Log in for full answers

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