Suppose that a competitive firm faces a market price of $8, an average variable cost of...

Suppose that a competitive firm faces a market price of $8, an average variable cost of (AVC) or 7, fixed costs of ($400) and is maximizing their profits by producing 200 units. Will the firm produce in the short run? Will the firm produce in the long run?

Solutions

Expert Solution

Average fixed cost = 400/200= 2

ATC = 2 + 7 = 9

Since Price is greater than average variable cost, the firm should continue to produce in the short run.

Price of $8 is less than ATC of $9, the firm should exit in the long run.

Rahul Sunny answered 1 year ago

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