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If average variable costs exceed the market price what level of output should the firm produce...

If average variable costs exceed the market price what level of output should the firm produce ? what if there are no fixed costs

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Answer #1

In such a condition the firm should go for a shutdown. Here Total revenue will not only be less than the total cost but it will also be less than the total variable cost. Here the price is so low that the firm does not receive sufficient revenue to cover even its variable cost. Thus not only will the fixed cost go unpaid, but a portion of its variable cost will also go unpaid. Hence the firm minimizes its losses by shutting down its production in the short run and will wait for higher prices. In the long run, the firm will leave production altogether if prices still remain below average variable cost

The same thing will happen if there will be no fixed cost, since In that case ATC=AVC > P, which will ultimately lead us to the same conclusion

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