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Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?
- a)The firm should shutdown in order to minimise its losses.
- b)The firm should raise its price enough to cover its losses.
- c)The firm should move its resources to another industry.
- d)The firm should continue to operate in the short run in order to minimize its losses.
Correct answer is option 'D'. Can you explain this answer?
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Suppose that, at the profit-maximizing level of output, a firm finds t...
The Correct answer is option 'D', which is explained below:
Short Run vs Long Run
In the short run, a firm has some fixed costs and some variable costs. Fixed costs are those which do not change with the level of output, while variable costs change with the level of output. In the long run, all costs become variable costs because the firm can adjust all its inputs.
Profit-Maximizing Level of Output
The profit-maximizing level of output is the level of output where the difference between total revenue and total cost is greatest. A firm should produce at this level of output to maximize profits.
Market Price vs Average Total Cost vs Average Variable Cost
Market price is the price at which a firm can sell its product in the market. Average total cost (ATC) is the total cost per unit of output, which includes both fixed and variable costs. Average variable cost (AVC) is the total variable cost per unit of output.
If the market price is less than average total cost, the firm is making a loss on each unit of output. If the market price is less than average variable cost, the firm is making a loss on each unit of output that it produces in the short run.
Response
In this scenario, the market price is less than average total cost but greater than average variable cost. This means that the firm is making a loss on each unit of output, but it is covering its variable costs. In the short run, the firm should continue to operate and produce at the profit-maximizing level of output to minimize its losses. If the firm shuts down, it will still have to pay its fixed costs, which will increase its losses. However, in the long run, if the market price remains below average total cost, the firm should exit the industry and move its resources to another industry where it can earn a profit.
Short Run vs Long Run
In the short run, a firm has some fixed costs and some variable costs. Fixed costs are those which do not change with the level of output, while variable costs change with the level of output. In the long run, all costs become variable costs because the firm can adjust all its inputs.
Profit-Maximizing Level of Output
The profit-maximizing level of output is the level of output where the difference between total revenue and total cost is greatest. A firm should produce at this level of output to maximize profits.
Market Price vs Average Total Cost vs Average Variable Cost
Market price is the price at which a firm can sell its product in the market. Average total cost (ATC) is the total cost per unit of output, which includes both fixed and variable costs. Average variable cost (AVC) is the total variable cost per unit of output.
If the market price is less than average total cost, the firm is making a loss on each unit of output. If the market price is less than average variable cost, the firm is making a loss on each unit of output that it produces in the short run.
Response
In this scenario, the market price is less than average total cost but greater than average variable cost. This means that the firm is making a loss on each unit of output, but it is covering its variable costs. In the short run, the firm should continue to operate and produce at the profit-maximizing level of output to minimize its losses. If the firm shuts down, it will still have to pay its fixed costs, which will increase its losses. However, in the long run, if the market price remains below average total cost, the firm should exit the industry and move its resources to another industry where it can earn a profit.
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Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer?
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Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer?.
Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?a)The firm should shutdown in order to minimise its losses.b)The firm should raise its price enough to cover its losses.c)The firm should move its resources to another industry.d)The firm should continue to operate in the short run in order to minimize its losses.Correct answer is option 'D'. Can you explain this answer?.
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