The figure given below shows the revenue and cost curves of a perfectly competitive firm.Figure 10.5
MC: Marginal cost curve
MR: Marginal revenue curve.ATC: Average-total-cost curve
AVC: Average-variable-cost curve
-For a perfectly competitive firm, in the short run, which of the following statements is true?

Question

The figure given below shows the revenue and cost curves of a perfectly competitive firm.Figure 10.5
  MC: Marginal cost curve
MR: Marginal revenue curve.ATC: Average-total-cost curve
AVC: Average-variable-cost curve
-For a perfectly competitive firm, in the short run, which of the following statements is true?

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm should continue to produce as long as the price is above the minimum average variable cost (AVC). This is because if the price is above AVC, the firm will be able to cover its variable costs and some portion of its fixed costs, and thus avoid a loss. However, if the price falls below AVC, the firm will not be able to cover its variable costs, and shutting down will minimize losses. The figure shows that minimum AVC occurs at point B, where the AVC curve intersects with the MC curve. Thus, if the price falls below P1, the firm should shut down. Option A is incorrect because a price above minimum AVC but below average total cost (ATC) will still result in a loss for the firm. Option C is incorrect because marginal cost is upward sloping, not parallel to the quantity axis. Option D is incorrect because in perfect competition, price is equal to marginal revenue. Option E is also incorrect because while every firm contributes to market output, in perfect competition, each firm's output is insignificant relative to the total market output.

The Figure Given Below Shows the Revenue and Cost Curves