If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: multiple choiceMR < MC.MR = MC.MR > MC.none of the above.
Question
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: multiple choiceMR < MC.MR = MC.MR > MC.none of the above.
Solution
To determine the correct answer, let's analyze the conditions under which a perfectly competitive firm should produce rather than shut down.
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Perfectly Competitive Market Characteristics:
- Firms are price takers, meaning they accept the market price as given.
- Marginal Revenue (MR) equals the market price (P).
- Firms aim to maximize profit.
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Profit Maximization Rule:
- A firm maximizes profit by producing the quantity of output where Marginal Revenue (MR) equals Marginal Cost (MC). This is because producing beyond this point would increase costs more than revenue, and producing less would mean not taking full advantage of potential profit.
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Shutdown Decision:
- A firm should continue to produce as long as it can cover its variable costs in the short run. This means that the price (P) should be greater than or equal to the average variable cost (AVC).
- If the price falls below AVC, the firm should shut down in the short run because it cannot cover its variable costs.
Given these points, the correct answer is:
MR = MC.
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