Sia
Question
Macroeconomics
Posted 10 months ago
The market for boxed pasta is perfectly competitive. Currently, the price of a box of pasta is less than average total cost (ATC) but greater than average variable cost (AVC).
Which of the following occurs in the short-run?
Choose 1 answer:
(A) Firms exit the industry.
B Firms enter the industry.
(C) Firms produce in the short run.
(D) Firms shut down.
(E) Firms produce the output where average total cost is lowest.
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Answer from Sia
Posted 10 months ago
Solution
a
Short-Run Production Decision: In the short run, a firm will continue to produce as long as the price (P) is greater than the average variable cost (AVC), because it can cover its variable costs and contribute to fixed costs
b
Shutdown Decision: A firm will shut down in the short run if the price is less than the AVC, as it cannot cover its variable costs. Since the price is given to be greater than AVC, the firm will not shut down
c
Exit Decision: Firms exit the industry in the long run if they cannot cover their average total costs (ATC). However, in the short run, they may continue to produce even if the price is less than ATC but greater than AVC
d
Firm Behavior in Perfect Competition: In a perfectly competitive market, firms are price takers and will adjust their output to the point where price equals marginal cost (P = MC), provided P > AVC
Answer
(C) Firms produce in the short run.
Key Concept
Short-Run Production Decision in Perfect Competition
Explanation
In a perfectly competitive market, firms will continue to produce in the short run as long as the price is greater than the average variable cost, even if it is less than the average total cost.
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