Question

If the price taking firm receives for its product is $10, its minimum AVC is $8...

If the price taking firm receives for its product is $10, its minimum AVC is $8 and its minimum ATC is $15 then:

A the firm will make a loss and shut down immediately
B the firm can make a profit
C it will make a loss and choose to continue to produce in the short run
D the firm will make a small profit
E none of the above

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Answer #1

As we know the firm, in the perfect competition, should continue to produce in the short run (despite loss) if the price is greater than the minimum AVC and, in the long run, the firm should continue to produce if the price is greater than the minimum ATC. In this case, the firm should continue to produce in the short run since the price is greater than the minimum AVC but it should shut down in the long run because the price is less than the minimum ATC, so the right answer is option C, that is, it will make a loss and choose to continue to produce in the short run.

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