Question

If a price-taking firm receives for its product is $5, its minimum AVC is $8 and...

If a price-taking firm receives for its product is $5, its minimum AVC is $8 and its minimum ATC is $12 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 enjoys a large profit
E None of the above

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Homework Answers

Answer #1

If the firm is price-taker then the price will remain constant at every quantity.

Now the minimum of average total cost (ATC) is given as $12.

Loss (Per unit) = ATC - Price

Loss (Per unit) = 12 - 5

Loss (Per unit) = 7

Hence the firm is having a loss of $7 per unit

A firm shut's down when it is unable to cover its minimum of average variable cost from the price. So price is $5 and the minimum of AVC is $8 so the price is unable to cover the average variable cost hence the firm will shut-down.

Option A is correct

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