Chapter 20: Problem 11

Which statement is true? (LO8) a) A firm will operate in the short run when total revenue exceeds fixed costs. b) A firm will operate in the short run when total revenue exceeds variable costs. c) A firm will shut down when total cost equals total revenue. d) None of these statements is true.

Short Answer

Expert verified

The true statement is: A firm will operate in the short run when total revenue exceeds variable costs (statement b).

Step by step solution

Understanding the terms

Before determining which statement is true, let's briefly go over the terms used in the statements. 1. Total Revenue (TR): The amount of money a firm receives from selling its products and services. 2. Fixed Costs (FC): The costs that do not change with changes in the quantity of output produced. Examples include rent, salaries, and equipment costs. 3. Variable Costs (VC): The costs that change with changes in the quantity of output produced. Examples include raw materials, labor costs, and utilities. 4. Total Costs (TC): The sum of all costs, both fixed and variable, incurred by the firm.

Evaluating Statement a)

"A firm will operate in the short run when total revenue exceeds fixed costs." While it might be tempting to think that covering fixed costs would be enough for a firm to operate, this statement is false. A firm would still need to cover its variable costs to continue operating profitably.

Evaluating Statement b)

"A firm will operate in the short run when total revenue exceeds variable costs." This statement is true. In the short run, a firm will choose to operate as long as its total revenue exceeds its variable costs. Even if the firm doesn't cover all its fixed costs, it still benefits from covering its variable costs and contributing something towards its fixed costs.

Evaluating Statement c)

"A firm will shut down when total cost equals total revenue." This statement is false. When total costs equal total revenues, the firm is breaking even (i.e., has zero profit). In the short run, a firm might choose to continue operating as they still cover their variable costs. Short-run decision-making focuses on whether the firm can at least cover its variable costs.

Evaluating Statement d)

"None of these statements is true." Since statement b) is true, statement d) is false. In conclusion, the true statement is: A firm will operate in the short run when total revenue exceeds variable costs (statement b).