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In a competitive market, if price exceeds Average Variable Cost (AVC) but remains less than Average Cost (AC) at the equilibrium, the firm is:
- a)Making a profit
- b)Planning to quit
- c)Experiencing loss but should continue production
- d)Experiencing loss but should discontinue production
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
In a competitive market, if price exceeds Average Variable Cost (AVC) ...
Explanation:
In a competitive market, a firm will continue to produce as long as it is able to cover its variable costs. Variable costs are the costs that vary with the level of output, such as the cost of raw materials, labor, and energy. If the price of the product is greater than the variable cost of producing it, the firm will be able to cover its variable costs and make a positive contribution to fixed costs. However, if the price is less than the average total cost, the firm will be experiencing a loss.
AVC and AC
- Average Variable Cost (AVC) is the variable cost per unit of output. It is calculated by dividing total variable cost by the level of output.
- Average Cost (AC) is the total cost per unit of output. It is calculated by dividing total cost (fixed and variable) by the level of output.
Equilibrium
In a competitive market, the equilibrium price is determined by the intersection of the market demand and supply curves. At the equilibrium price, the quantity demanded and supplied are equal. If the equilibrium price is greater than the AVC, the firm will be able to cover its variable costs and make a positive contribution to fixed costs. However, if the equilibrium price is less than the AC, the firm will be experiencing a loss.
Option C - Experiencing loss but should continue production
If the price exceeds the AVC but remains less than the AC at the equilibrium, the firm will be experiencing a loss. However, since the price is greater than the AVC, the firm will be able to cover its variable costs. In this situation, the firm should continue to produce in the short run, as it will be able to cover its variable costs and make a positive contribution to fixed costs. In the long run, the firm may need to adjust its production or exit the market if it is unable to cover its total costs. Therefore, option C is the correct answer.
In a competitive market, a firm will continue to produce as long as it is able to cover its variable costs. Variable costs are the costs that vary with the level of output, such as the cost of raw materials, labor, and energy. If the price of the product is greater than the variable cost of producing it, the firm will be able to cover its variable costs and make a positive contribution to fixed costs. However, if the price is less than the average total cost, the firm will be experiencing a loss.
AVC and AC
- Average Variable Cost (AVC) is the variable cost per unit of output. It is calculated by dividing total variable cost by the level of output.
- Average Cost (AC) is the total cost per unit of output. It is calculated by dividing total cost (fixed and variable) by the level of output.
Equilibrium
In a competitive market, the equilibrium price is determined by the intersection of the market demand and supply curves. At the equilibrium price, the quantity demanded and supplied are equal. If the equilibrium price is greater than the AVC, the firm will be able to cover its variable costs and make a positive contribution to fixed costs. However, if the equilibrium price is less than the AC, the firm will be experiencing a loss.
Option C - Experiencing loss but should continue production
If the price exceeds the AVC but remains less than the AC at the equilibrium, the firm will be experiencing a loss. However, since the price is greater than the AVC, the firm will be able to cover its variable costs. In this situation, the firm should continue to produce in the short run, as it will be able to cover its variable costs and make a positive contribution to fixed costs. In the long run, the firm may need to adjust its production or exit the market if it is unable to cover its total costs. Therefore, option C is the correct answer.
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In a competitive market, if price exceeds Average Variable Cost (AVC) but remains less than Average Cost (AC) at the equilibrium, the firm is:a)Making a profitb)Planning to quitc)Experiencing loss but should continue productiond)Experiencing loss but should discontinue productionCorrect answer is option 'C'. Can you explain this answer?
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