Microeconomic theory argues that it is economically rationale (and profitable) to sell additional output as long as the price covers the variable costs of production. How is this relevant to the determination of whether dumping has occurred?

According to microeconomic theory, it is economically rational and profitable for a firm to sell additional output as long as the price it receives for that output covers the variable costs of production. Variable costs are the costs that vary directly with the level of output, such as raw materials, labor, and variable portion of overheads. Essentially, the idea is to continue selling the product until the price no longer covers the cost of producing an additional unit.

Dumping can be defined as the practice of exporting goods to another country at a price that is below the cost of production or lower than the price charged domestically. Dumping is considered to be unfair competition, as it can force competitors out of the market in the importing country, potentially leading to a monopoly or a decrease in domestic production. In international trade, dumping is usually investigated and regulated by trade authorities in order to prevent its negative consequences.

The microeconomic theory of selling additional output as long as the price covers the variable costs of production can be relevant to the determination of whether dumping has occurred in the following way: When a firm is selling goods in its domestic market at higher prices, it expects to cover not only the variable costs but also the fixed costs (costs that do not change with the level of output, such as rent, insurance, and depreciation) and a reasonable profit margin. If the demand in the domestic market is not sufficient to cover the fixed costs and profit, the firm might look for other markets in which it may sell its products at prices that cover at least the variable costs. In this case, selling at the marginal cost but still above the variable cost is considered rational behavior. If a firm starts exporting goods at prices that are below the variable costs in the foreign market, this can be seen as dumping. An investigation into whether dumping has occurred often involves comparing the prices and costs in the domestic market and the exporting market, considering both variable and fixed costs. If prices in the exporting market are found to be below the variable costs of production, it could be evidence of dumping.

In conclusion, the concept from microeconomic theory that it is economically rational to sell additional output as long as the price covers the variable costs of production can be relevant to the determination of whether dumping has occurred. While it is rational to sell products in an exporting market at a lower price than the domestic market as long as variable costs are met, selling below variable costs may be considered dumping and can have negative effects on fair competition and industry in the importing country.