In a perfectly competitive market, a firm will continue producing in the short run as long as it can cover its:

• A. fixed costs
• B. marginal costs
• C. average total costs
• D. average variable costs

Answer: (D)

Verified step by step guidance

1. Understand the context: In a perfectly competitive market, firms decide whether to produce or shut down in the short run based on their costs and revenues.
2. Recall the shutdown rule: A firm will continue producing in the short run if the price it receives for its product covers its average variable costs (AVC). This is because fixed costs must be paid regardless of production, so the firm focuses on covering variable costs to minimize losses.
3. Identify the relevant costs: Fixed costs are sunk in the short run and do not affect the shutdown decision. Marginal cost (MC) helps determine the profit-maximizing output level but is not the criterion for shutting down. Average total cost (ATC) includes fixed costs and variable costs, but the firm can operate at a loss if price covers AVC.
4. Formulate the shutdown condition mathematically: The firm produces if \(P \geq AVC\), where \(P\) is the market price and \(AVC\) is the average variable cost.
5. Summarize: Since the firm must cover at least its average variable costs to justify continuing production in the short run, the correct answer is that the firm will continue producing as long as it can cover its average variable costs.