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A competitive firm in the short run incur losses. The firm continues production, if:
- a)P > AVC
- b)MC = MR = P
- c)P < AVC
- d)MC = AC = AR
Correct answer is option 'A'. Can you explain this answer?
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A competitive firm in the short run incur losses. The firm continues p...
Explanation:
In the short run, a competitive firm may incur losses due to various reasons such as high input costs, low demand for their product, or high competition. However, the firm may still continue production if the following condition is met:
P < />
Where P is the price of the product and AVC is the average variable cost. This condition indicates that the price of the product is less than the average variable cost of producing it. In this scenario, the firm is not covering its variable costs and is making losses. However, it is better for the firm to continue production as long as it is able to cover its variable costs. This is because if the firm shuts down production, it will still incur fixed costs, which will add to its losses.
The reason behind this condition is that the firm's fixed costs are sunk costs, which means that they cannot be recovered in the short run. The only costs that can be controlled in the short run are the variable costs. Therefore, if the firm is able to cover its variable costs, it is better for it to continue production and try to cover its fixed costs in the long run.
Other options mentioned in the question, such as MC = MR = P or MC = AC = AR, are not relevant in this scenario. These conditions indicate that the firm is making normal profits or is in equilibrium, which is not the case when the firm is incurring losses.
In the short run, a competitive firm may incur losses due to various reasons such as high input costs, low demand for their product, or high competition. However, the firm may still continue production if the following condition is met:
P < />
Where P is the price of the product and AVC is the average variable cost. This condition indicates that the price of the product is less than the average variable cost of producing it. In this scenario, the firm is not covering its variable costs and is making losses. However, it is better for the firm to continue production as long as it is able to cover its variable costs. This is because if the firm shuts down production, it will still incur fixed costs, which will add to its losses.
The reason behind this condition is that the firm's fixed costs are sunk costs, which means that they cannot be recovered in the short run. The only costs that can be controlled in the short run are the variable costs. Therefore, if the firm is able to cover its variable costs, it is better for it to continue production and try to cover its fixed costs in the long run.
Other options mentioned in the question, such as MC = MR = P or MC = AC = AR, are not relevant in this scenario. These conditions indicate that the firm is making normal profits or is in equilibrium, which is not the case when the firm is incurring losses.
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Community Answer
A competitive firm in the short run incur losses. The firm continues p...
A firm encounters its Shutdown price at Price=AVC
If the firm isn't able to cover it's average variable cost then it is better for the firm to shut down.
But if the firm is able to cover it's average fixed costs then it can operate to minimise it's losses as fixed costs are already incurred
If the firm isn't able to cover it's average variable cost then it is better for the firm to shut down.
But if the firm is able to cover it's average fixed costs then it can operate to minimise it's losses as fixed costs are already incurred
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A competitive firm in the short run incur losses. The firm continues production, if:a)P > AVCb)MC = MR = Pc)P < AVCd)MC = AC = ARCorrect answer is option 'A'. Can you explain this answer?
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