When the price is $10.00, ATC is $12.00, and AVC is $8.00, which statement is correct?...

When the price is $10.00, ATC is $12.00, and AVC is $8.00, which statement is correct?

Question 10 options:

	The firm is happy because they're earning positive profits
	The firm should shut down because they're losing $2.00 in each good they sell.
	The firm should stay open even though they're losing $2.00 per good because P > AVC.
	The is earning $2.00 in profits at this point.

Expert Solution

The correct answer is: c. The firm should stay open even though they're losing $2.00 per good because P > AVC.

Explanation:

When P= AVC it implies that the firm is not even able to cover its variable costs therefore it should shut down.

When P < ATC but P > AVC then it implies that firm is earning losses but is able to cover its variable costs. The firm should continue operations since the fixed costs can be covered in the long run.

Since P ($10) < ATC ($12) but P($10) > AVC ($8), the firm is earning losses of $2 per unit but should continue their operations.

When P = ATC it implies the firm is neither earning profits nor incurring losses.

When P > ATC it implies the firm is earning positive profits.

Rahul Sunny answered 2 years ago

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