(The Short-Run Firm Supply Curve) Each of the following situations could exist for a perfectly competitive...

(The Short-Run Firm Supply Curve) Each of the following situations could exist for a perfectly competitive firm in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run, or whether additional information is needed to determine what it should do in the short run.

The total cost exceeds total revenue at all output levels.
The total variable cost exceeds total revenue at all output levels.
Total revenue exceeds the total fixed cost at all output levels.
Marginal revenue exceeds marginal cost at the current output level.
Price exceeds average total cost at all output levels.
The average variable cost exceeds the price at all output levels.
The average total cost exceeds the price at all output levels.

Solutions

Expert Solution

In short run a firm should shut down when it failed to recover its variable cost i.e. Total revenue(TR) < Total Variable Cost(TVC) or Price(P) < Average Variable Cost(AVC) and should produce when TR > TVC or P > AVC

(i) The total cost exceeds total revenue at all output levels.

With the above information we cannot confirm whether P > AVC or TR > TVC or not. Thus we need more information.

(ii) The total variable cost exceeds total revenue at all output levels.

As TVC > TR, thus he should shut down.

(iii) Total revenue exceeds the total fixed cost at all output levels.

With the above information we cannot confirm whether P > AVC or TR > TVC or not. Thus we need more information.

(iv) Marginal revenue exceeds marginal cost at the current output level.

To confirm whether he should shut down or produce we need information regarding P and AVC which is not provided. Hence we need more information.

(v) Price exceeds average total cost(ATC) at all output levels.

It is given that P > ATC and as ATC(= AVC + AFC) > AVC => P > ATC > AVC => P > AVC.

Hence he should produce.

(vi) The average variable cost exceeds the price at all output levels.

As AVC > P, thus he should shut down.

(vii) The average total cost exceeds the price at all output levels.

It is given that ATC > P but we cannot confirm whether AVC > P or not. Thus we need more information.

Rahul Sunny answered 1 year ago

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