Homework SourseA profitmaximizing firm is producing where MR MC and has an
A profit-maximizing firm is producing where MR = MC and has an average total cost of $12, but it gets a price of $8 for each good it sells. What would you advise the firm to do if you knew average variable costs were $9?
A. The firm should shut down in the short run and exit the market in the long run.
B. The firm should exit the market in the long run, but it should produce in the short run since it is covering average fixed costs.
C. The firm should shut down in the short run. Once the firm recoups its fixed costs, it should reopen in the long run.
D. The firm is producing where MR = MC, so it should produce in both the short run and long run.
| A. The firm should shut down in the short run and exit the market in the long run. | |
| B. The firm should exit the market in the long run, but it should produce in the short run since it is covering average fixed costs. | |
| C. The firm should shut down in the short run. Once the firm recoups its fixed costs, it should reopen in the long run. | |
| D. The firm is producing where MR = MC, so it should produce in both the short run and long run. |
Solution
A. The firm should shut down in the short run and exit the market in the long run.
In the given question average variable cost is 9 while price is 8. If price falls below AVC a firm must shut down immediately as it ca atleast minimize its loses by stopping the production.
| A. The firm should shut down in the short run and exit the market in the long run. In the given question average variable cost is 9 while price is 8. If price falls below AVC a firm must shut down immediately as it ca atleast minimize its loses by stopping the production. |
