Final answer:
Chris should continue operating in the short run if revenue covers variable costs and contributes to fixed costs. However, he cannot increase the price due to the perfectly competitive market. If variable costs exceed revenue, it's best to shut down to avoid further losses.
Step-by-step explanation:
Given that the hot dog market in Chicago is perfectly competitive and each hot dog sells for $4, we analyze Chris's hot dog stand costs. Chris incurs a cost per hot dog of $2.5 for ingredients (variable cost) and $2 for the city permit (fixed cost), totalling $4.5 to produce one hot dog while selling them at $4. Therefore, for each hot dog sold, Chris would make a loss of $0.5.
In a perfectly competitive market, Chris cannot increase the price due to market prices being determined by supply and demand, not by individual sellers.
Shutting down the stand might be a consideration in the long run if losses persist, however, in the short run, Chris should continue to operate if the total revenue covers the variable costs, and contributes to the fixed costs, otherwise, if variable costs exceed revenue from sales, the stand should be shut down to avoid further losses.