econonilt 12. THE SHORT-RUN FIRM SUPPLY CURVE Each of the follow ng sity. 1 atio
ID: 1130767 • Letter: E
Question
econonilt 12. THE SHORT-RUN FIRM SUPPLY CURVE Each of the follow ng sity. 1 ations could exist for a perfectly competitive firm i In cach case,indicate whether the firm should produc run or shut down in the short run, or whether additional inf tion is needed to determine what it should do in the short run. in the shon informa a. Total cost exceeds total revenue at all output levels. b. Total variable cost exceeds total revenue at all output levelk c. Total revenue exceeds total fixed cost at all output levels. d. Marginal revenue exceeds marginal cost at the current our put level. e. Price exceeds average total cost at all output levels. f. Average variable cost exceeds price at all output levels. &. Average total cost exceeds price at all output levels.Explanation / Answer
A. When Total cost exceeds total revenue, we require the additional information of the total variable costs. If the Total revenues are enough to cover the total variable costs in the short run, production can happen. However, if even the variable costs are not being met, then production will have to be shut down.
B. If the total variables costs exceed the total revenue at all output levels, then the firm should stop production in the short run, since its variables expenses are only not being covered, so production isn't profitable in this scenario.
C. When Total revenue exceeds total fixed cost, we again require the additional information of the total variable costs. The priority should be to check if the variable costs are being covered in the short run, and then the firm should focus on covering the fixed costs over the long run.
D. If at the current output level, the marginal revenue exceeds the marginal cost, then the firm should continue production uptil the output level where the marginal revenue is equal to the marginal cost, as that is the profit maximising level.
E. If price exceeds the average total cost at all output levels, then the firm should continue to stay in production as all its expenses are getting covered. It should continue to produce uptil the profit maximising level of output is reached, i.e. when marginal revenue is equal to the marginal cost.
F. If the average variable cost exceeds the price at all output levels, then the firm should not produce in the short run, because its variable costs are not being met by the revenue that will be earned from having a price that is lower than the average variable cost.
G. The argument will be similar as part A. When average total cost exceeds price, we require the additional information of the average variable costs. If the price is enough to cover the average variable costs in the short run, production can happen. However, if even the variable costs are not being met, then production will have to be shut down.
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