CFA Practice Question

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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."
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