Question

State the conditions for a perfectly competitive market firm to halt its production (i) short term...

State the conditions for a perfectly competitive market firm to halt its production

(i) short term

(ii) Long term?

Homework Answers

Answer #1
  • If variable cost of production can't be covered by the revenue generated from the sale, afirm will shutdown its production process.
  • In the short run if the price exceeds average variable costs then the firm should continue its production process. However, if the variable cost is greater than the revenue from the sale proceeds then the firm should shutdowm immidiately.
  • In other words, we can say if marginal revenue is greater than average total cost, the competitive firm will continue to produce, even when marginal revenue is less than the variable, or marginal cost,.
  • In the long run if P ≥ LRAC then the firm will remain in the production and will not exit the industry. On the other hand if P < LRAC, then the firm will halt its production and exit the industry.
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