Question

Vicki makes rag dolls. The market for rag dolls is perfectly competitive, and the going price is $8 per doll. Vicki's total costs are shown in the table below.

Quantity (dolls per day)	Total cost ($)
0	10.00
1	13.00
2	17.20
3	22.60
4	29.20
5	37.00
6	46.00
7	56.20

In the scenario above, Vicki should _____ in the short run and _____ in the long run.

	shut down; continue to produce
	shut down; go out of business
	continue to produce; continue to produce
	continue to produce; go out of business

Answer 1

option 3

continue to produce; continue to produce

the

FC=the cost is same at all level and it is equal to the total cost at Q=0
VC=TC-FC
AVC=VC/Q

ATC=TC/Q

Quantity	Total cost ($)	VC	AVC	ATC
0	10	0
1	13	3	3	13
2	17.2	7.2	3.6	8.6
3	22.6	12.6	4.2	7.53
4	29.2	19.2	4.8	7.3
5	37	27	5.4	7.4
6	46	36	6	7.67
7	56.2	46.2	6.6	8.03

A firm produces in the short run if the P>min(AVC), min(AVC)=3 and P=8

it means the firm will continue to produce in the short run

A firm produces in the long run if the P>min(ATC), min(ATC)=7.3 and P=8

so the firm will produce in the long run as well.