Suppose ABC Corp.is a firm producing newsprint in a perfectly competitive industry.We have the following information about the firm's production: - output (Q)= 1500 tonnes per month
- average total cost (ATC)= $627 per tonne
- average variable cost (AVC)= $614 per tonne
- marginal revenue (MR)= $620 per tonne
- marginal cost (MC)= $620 per tonne
In the short run,this firm should

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm should continue to produce as long as price exceeds average variable cost (P > AVC). In this case, the firm's price is equal to its marginal cost, so it is not earning any economic profit, but it is covering its variable costs. Therefore, the firm should maintain production at the current level of 1500 tonnes per month. If the price were to fall below the firm's minimum average variable cost of $614 per tonne, it would be best for the firm to shut down in the short run, but this is not the case in this scenario.