Under what condition will firms in a perfectly competitive market continue manufacturing in the short run ?
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Answer: A. The price covers average variable cost
Explanation
A competitive firm continues operating in the short run if the market price covers average variable cost. Operating covers all variable production expenses and contributes something toward paying fixed overhead costs. Shutting down immediately would cause losses equal to total fixed costs, which is worse than operating. Perfect competition features numerous price-taking firms selling identical products in an unfettered open market. Short-run production decisions require separating fixed costs from variable costs that change with output levels. Total revenue must exceed total variable cost for a business to justify continuing temporary production operations.
Covering variable cost alone is insufficient because the price must cover average variable cost per unit. Average fixed cost is sunk in the short run and should not dictate whether a factory continues operating. Covering fixed costs is a long-run requirement for survival, not a prerequisite for short-run production.
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