Question

At a price of $10, if a competitive firm, in the long run, is indifferent between exiting the market or continuing to operate in the market, what must also be equal to $10? a) The firm’s average variable cost. b) The firm’s minimum average total cost. c) The firm’s average marginal cost. d) The firm’s minimum average fixed cost

Answer 1

Option 'B' is correct., The average minimum total cost.

When the price is above minimum of average total cost,firm is enjoying profit and attracts entry into the market.

But, when price reduces to minimum of average total cost, in long run firm is indifferent as to be in the market or exit the market as it is making zero profit. And the market now doesn't attract new entry.

A price below the average total cost will force the firm to exit in the long run but may continue to run in short run as long as the price is above the minimum of average variable cost.

Hence, Option B is correct.