Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $700; AVC = $500; MC = $600; MR = $600. The firm should

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In perfect competition, the optimal output level is where MR equals MC. In this case, MR is equal to MC at a quantity where the firm covers its variable costs (AVC) and some of its fixed costs (because P > AVC). Since the firm's ATC is higher than the price it receives, it is making a loss in the short-run. However, shutting down would result in a loss equal to its fixed costs, so it is better to continue operating and cover some of its fixed costs. Thus, the firm should produce its current output in the short-run.

Suppose a Perfectly Competitive Firm Faces the Following Short-Run Cost