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Basic Question 3 of 8
In a competitive market, a firm will continue to operate in the long run as long as price exceeds long-run average variable cost. True or False?
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan | It is important that it's short-term: temporary |
| aroman21 | I'm not sure about this, can someone provide some color? If a firm can charge a higher price than cost, why wouldn't they stay in operation? |
| nike | aroman: you cannot do that in the long run: notice it's a competitive market. |
| akanimo | aroman21 ... the question says "price exceeds long run average VARIABLE COST" ... so the price only exceeds PART of the cost ... it does not cover the other AVERAGE FIXED COSTS so the price cannot be guaranteed to meet the AVERAGE TOTAL COST hence the posibility of losses ... hence the FALSE answer |
| hdavid57 | I thought that there were no long-term fixed costs, which means that TC=TVC in the long-term. |
| JepTang | I think a firm should stay in the industry in the long run as long as it satisfies the MINIMUM EFFICIENT SCALE. I agree with Nike! |
| geofin | The official CFA readings don't even mention long run average variable cost because it equals to the LRATC (long run average total cost): "The long run is defined as a time period in which all factors of production are variable, including technology, physical capital, and plant size." |
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Learning Outcome Statements
determine and interpret break even and shutdown points of production, as well as how economies and diseconomies of scale affect costs under perfect and imperfect competition
CFA® 2024 Level I Curriculum, Volume 1, Module 1.