Multiple Choice
In the context of a firm's shutdown decision, what distinguishes the short run from the long run?
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11. Perfect Competition
Short Run Shutdown Decision
Multiple Choice
Which of the following represents the firm's short-run condition for shutting down?
A
Total revenue is less than total cost (TR < TC)
B
Price is greater than average total cost (P > ATC)
C
Total revenue is less than variable cost (TR < VC)
D
Marginal cost equals marginal revenue (MC = MR)
Verified step by step guidance1
Understand the difference between the short-run and long-run decisions for a firm. In the short run, the firm must decide whether to continue operating or to shut down temporarily based on its ability to cover variable costs.
Recall that total revenue (TR) is the amount the firm earns from selling its output, total cost (TC) includes both fixed and variable costs, and variable cost (VC) changes with the level of output.
Recognize that the shutdown condition in the short run occurs when the firm cannot cover its variable costs, meaning that continuing production would lead to greater losses than shutting down.
Express the shutdown condition mathematically as: \(\text{Total Revenue} < \text{Variable Cost}\) or \(TR < VC\). This means the firm loses less money by shutting down than by producing.
Compare this condition to other options: \(TR < TC\) is a long-run loss condition, \(P > ATC\) means the firm is profitable, and \(MC = MR\) is the profit-maximizing output rule, not a shutdown condition.
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