A price-taking firm in the short run should not produce any level of output unless
A)marginal revenue exceeds marginal cost.
B)marginal revenue equals average total cost.
C)average revenue equals or exceeds average variable cost.
D)average revenue equals or exceeds average total cost.
E)it is earning positive profits.

Question

Quizplus · Accepted Answer

In the short run, a price-taking firm should produce only if its average revenue (price) covers its variable costs. This is because in the short run, the firm cannot adjust its fixed costs, so it must at least cover its variable costs to minimize losses. This condition is expressed by option C, where the firm should produce if average revenue (price) is greater than or equal to average variable cost. Options A, B, and D describe conditions for profit-maximizing output in a perfectly competitive market in the long run. Option E is not necessarily true and may be misleading, as a firm can still continue to produce even if it is not earning positive profits, as long as it covers its variable costs.

A Price-Taking Firm in the Short Run Should Not Produce