1. Each of the following situations could exist for a firm in the short run. In
ID: 1227087 • Letter: 1
Question
1. Each of the following situations could exist for a firm in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run, or whether additional information is needed to determine what it should do in the short run.
a. Total cost exceeds total revenue at all output levels.
b. Total variable cost exceeds total revenue at all output levels.
c. Total revenue exceeds total fixed cost at all output levels.
d. Marginal revenue exceeds marginal cost at the current output level.
e. Price exceeds average total cost at all output levels.
f. Average variable cost exceeds price at all output levels.
g. Average total cost exceeds price at all output levels.
Explanation / Answer
a) If TC>TR then firm is making loss so it should shutdown
b) If TVC>TR then the firm is not even covering its variable costs let alone the fixed costs so it should shut down
c) Information needed on variable cost
d) As MR>MC then it means that revenue by additional unit production than its cost so firm should keep producing.
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