Question

The following information is relevant for an individual firm operating in a perfectly competitive market. Output...

The following information is relevant for an individual firm operating in a perfectly competitive market.

Output 10
Variable Cost $600
Fixed Cost $2,000
Marginal Cost $90
Price $90

What will be the firm's production decision in the short-run?

  • Other firms will enter into the market

  • Shutdown

  • Exit

  • Operate

Homework Answers

Answer #1

As we can see that

Total revenue = P *Q = 90 *10 = 900

Total cost = Variable + Fixed = 2600

So profit = 900 - 2600 = -1700

So this means that firm is facing a loss but firm will shutdown or operate depends on the position of Price and AVC.

Price = 90 , AVC = TVC / Q = 600/10 = 60

This state that Price is still greater than AVC , hence firm is able to carry out it's variable expenses. Hence firm will operate and will not shutdown.

Hence (D) part is a correct answer

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