Question

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

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