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When price is less than average variable cost at the profit maximizing level of output, a firm should :
- a)Shut down, since it cannot recover its variable cost
- b)Produce where MC = MR, if operating in short run
- c)Produce where MC = MR, if operating in long run
- d)None of the above
Correct answer is option 'A'. Can you explain this answer?
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When price is less than average variable cost at the profit maximizing...
Shutting down when price is less than average variable cost
When a firm is producing a good or service, it incurs two types of costs: fixed costs and variable costs. Fixed costs are those that do not vary with the level of output, while variable costs are those that do vary with the level of output. The average variable cost (AVC) is the variable cost per unit of output.
When the price of a good or service is less than the average variable cost at the profit maximizing level of output, a firm is not able to cover its variable costs. In this case, the firm should shut down in the short run since it cannot recover its variable cost. Shutting down means that the firm stops producing and selling the good or service.
This decision is based on the fact that the firm's revenue is not sufficient to cover its variable costs, let alone its fixed costs. By shutting down, the firm is able to minimize its losses by avoiding the variable costs associated with production. This is because a firm's fixed costs will still have to be paid even if it shuts down.
In the long run, firms can exit the industry if they are unable to cover their total costs (fixed and variable costs). This means that firms can shut down permanently if they are not able to make a profit.
To summarize, when the price is less than average variable cost at the profit maximizing level of output, a firm should shut down in the short run since it cannot recover its variable cost. In the long run, firms can exit the industry if they are unable to cover their total costs.
When a firm is producing a good or service, it incurs two types of costs: fixed costs and variable costs. Fixed costs are those that do not vary with the level of output, while variable costs are those that do vary with the level of output. The average variable cost (AVC) is the variable cost per unit of output.
When the price of a good or service is less than the average variable cost at the profit maximizing level of output, a firm is not able to cover its variable costs. In this case, the firm should shut down in the short run since it cannot recover its variable cost. Shutting down means that the firm stops producing and selling the good or service.
This decision is based on the fact that the firm's revenue is not sufficient to cover its variable costs, let alone its fixed costs. By shutting down, the firm is able to minimize its losses by avoiding the variable costs associated with production. This is because a firm's fixed costs will still have to be paid even if it shuts down.
In the long run, firms can exit the industry if they are unable to cover their total costs (fixed and variable costs). This means that firms can shut down permanently if they are not able to make a profit.
To summarize, when the price is less than average variable cost at the profit maximizing level of output, a firm should shut down in the short run since it cannot recover its variable cost. In the long run, firms can exit the industry if they are unable to cover their total costs.
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When price is less than average variable cost at the profit maximizing level of output, a firm should :a)Shut down, since it cannot recover its variable costb)Produce where MC = MR, if operating in short runc)Produce where MC = MR, if operating in long rund)None of the aboveCorrect answer is option 'A'. Can you explain this answer?
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