A perfectly competitive firm will cease production in the short run if marginal revenue falls be

step 1 Hello everyone, so this is a problem four from chapter 14. So this question is asking what a pro

A perfectly competitive firm will cease production in the...

Key Concepts

Perfect Competition

In a perfectly competitive market, there are numerous buyers and sellers, each firm is a price taker with no control over the market price, and the products are homogeneous. This framework ensures that each firm’s marginal revenue equals the market price, which is a key factor in its production decisions.

Marginal Revenue

Marginal revenue is the additional revenue a firm earns from selling one more unit of output. In perfect competition, marginal revenue is equal to the market price of the product because each additional unit is sold at the same price, making this concept crucial for analyzing production and shutdown decisions.

Shutdown Decision

The short-run shutdown rule for a firm is based on whether it can cover its variable costs. A firm should continue production as long as the price (or marginal revenue) is above the average variable cost, even if it does not cover total average cost. This decision rule focuses on covering operating costs and avoiding further losses by shutting down when the revenue is insufficient to cover the variable costs.

Average Total Cost vs. Average Variable Cost

Average total cost includes both fixed and variable costs, while average variable cost excludes fixed costs which are sunk in the short run. In the context of short-run production decisions, firms focus on average variable cost rather than average total cost since fixed costs must be incurred regardless of production levels. This distinction is crucial in determining whether a firm should shut down or continue operating in the short run.

Transcript

00:01 Hello everyone, so this is a problem four from chapter 14.

00:05 So this question is asking what a profit -maximating competitive firm going to do.

00:17 If this form is producing adequate quantity at wage marginal cost, it's in between average variable cost and average total cost.

00:27 And by first taking a quick look at the a, b, c, and d, we know we need to analyze both long -term decision and short -term decision, right? so first we can take a look at a short -term decision.

00:47 And also, as you were right, i took a screenshot from the textbook because i always thinking anything we need to answer this question.

00:59 Is from textbook, but we need to be careful about the material we're going to refer to.

01:07 So first we should take a look at a figure 3 on the top, right? and we know this form is producing the quantity in between the average total cost and average marginal cost.

01:26 So some point is in between here, right? so it's produced at this quantity, at this quantity.

01:35 And with this cost, so we know there's a lot of points you can pick up, allies is in between this to a blue curve, right? and by the explanation offered by the test book, we know that this firm won't shut down because the firm is producing at, it's not as this kind of light, right? it's like producing at this solid area.

02:11 So as long as the firm is producing and where the price is large than the average variable cost.

02:19 So we know the price is here...

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