- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 4. Breakeven Analysis and Shutdown Decision
CFA Practice Question
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?
Correct Answer: False
Short-run instead!
In the short run, it may be rational for a firm to continue to operate while earning negative economic profit if operating losses would be greater than incurring only fixed costs.
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." |