94, Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm

A. minimizes losses by producing at the minimum point of its AVC curve.
B. maximizes profits by producing where MR = ATC.
C. should close down immediately.
D. should continue producing in the short run but leave the industry in the long run if the situation persists.

Question

94, Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm

A. minimizes losses by producing at the minimum point of its AVC curve.
B. maximizes profits by producing where MR = ATC.
C. should close down immediately.
D.  should continue producing in the short run but leave the industry in the long run if the situation persists.

BlackTom AI · Accepted Answer

If market price lies between the minimum point of average variable cost (AVC) and average total cost (ATC), the firm covers its variable costs but not all of its total costs. 1) Relevant concepts - Profit (or loss) = Total Revenue (TR) − Total Cost (TC). Per‑unit: profit per unit = P − ATC. - Marginal revenue (MR) = price (P) in perfect competition. Profit maximization occurs where MR = MC (marginal cost). - Shutdown rule (short run): produce if P ≥ minimum AVC; shut down if P < minimum AVC. - Long run entry/exit: firms exit when P < ATC because they cannot cover total costs; in the long run firms earn zero economic profit (P → ATC). 2) Step‑by‑step reasoning - Given P is above min AVC, the shutdown rule says the firm should not close immediately: producing covers variable costs and contributes to fixed costs. - The firm chooses output Q where P (MR) = MC to maximize profit (or minimize loss). That Q is not necessarily at the minimum of AVC. - Because P is everywhere below ATC, at that profit-maximizing Q the firm has P < ATC, so profit per unit is negative and the firm incurs an economic loss: Loss = (ATC − P) × Q. 3) Intermediate rationale/calculation (no numeric values given) - TR = P × Q - TC = ATC × Q - Loss if producing = TC − TR = (ATC − P) × Q > 0 - Loss if shutting down = fixed costs (FC). Since P ≥ AVC, TR ≥ variable cost (VC), so producing yields TR − VC ≥ 0 and thus produces a smaller loss than shutting down (producing covers some FC). 4) Why the correct answer is correct Because P > min AVC, the firm should produce in the short run to minimize losses (it covers variable costs and contributes toward fixed costs). Because P < ATC, the firm incurs losses and, if this situation persists into the long run (no price recovery), firms will exit the industry. Thus the firm continues in short run but will leave in the long run if the condition persists. 5) Why other options are incorrect A: Producing at minimum AVC is not the profit‑maximizing rule; the firm sets output where MR = MC. B: MR = ATC is not a profit‑max rule; MR = MC is. C: Closing immediately is wrong because P > min AVC, so the firm covers variable costs and reduces losses by producing. 6) Conclusion The correct choice is D: the firm should continue producing in the short run but leave the industry in the long run if the situation persists. This matches the provided answer.

类似问题

So far, how many in-class activities have you completed? 16 or more

From the list below, the best definition of the term 'excise tax' is

From the list below, the best definition of the word 'subsidy' is

An increase in a excise tax imposed on wine producers is likely to result in

Which of the following is true for a monopoly firm?

A perfectly competitive firm is said to be more efficient than a monopoly firm because

Economic profit is calculated by

Explicit costs are

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单