Figure 10-2

-In the short run, perfectly competitive firms will determine whether to continue producing the current output, reduce output, or increase output based on the relationship between

Question

Figure 10-2
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-In the short run, perfectly competitive firms will determine whether to continue producing the current output, reduce output, or increase output based on the relationship between

Quizplus · Accepted Answer

In the short run, perfectly competitive firms will maximize profits or minimize losses by producing where marginal cost equals marginal revenue. Therefore, the relationship between price and marginal cost is the key factor in determining whether to continue producing, reduce output, or increase output. If price is higher than marginal cost, the firm will continue producing at the current level or even increase output. If price is lower than marginal cost but still higher than average variable cost, the firm will reduce output but continue producing in the short run. If price is lower than average variable cost, the firm will shut down production in the short run. The relationship between price and average cost (A), marginal revenue and average cost (C), and average revenue and average cost (D) are not as relevant in the short run decision-making process for perfectly competitive firms.

Figure 10-2 ​

Figure 10-2