Question

A perfectly competitive firm will continue to operate in the short run when the market price...

A perfectly competitive firm will continue to operate in the short run when the market price is below its average total cost if the

A.

price is also less than the minimum average variable cost.

B.

total fixed costs are less than total revenue.

C.

marginal revenue is greater than marginal cost.

D.

marginal cost is minimized.

E.

price is at least equal to the minimum average variable cost.

Homework Answers

Answer #1

E. price is at least equal to the minimum average variable cost.

reason: when the firm's price equals its average total cost, it breaks even. But when the price is below the average total cost, it incurs a loss. However, if the price is at least equal to its average variable cost, it can at least recover its cost of production. Hence it will continue its production in the short run.
(the difference between average total cost and average variable cost is the average fixed cost which it has to incur whether it produces any output or not.)

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