Question

Initially, the market price was p = $50, and the com- petitive firm’s minimum average variable cost was $42 while is minimum average cost was $54. Should it shut down? Why or why not? Now suppose the firm’s average variable cost increases by $9 at every quantity, while other firms in the market are unaf- fected. What happens to its average cost? Should the firm shut down now? Why or why not?

Answer 1

Answer :-

Given :

Market price = $50

Minimum average variable cost = $42

Minimum Average cost = $54

In a competitive firm, the firm make decision to shut down when the average variable cost exceeds the price of the market. Since, here the market price $50 which is greater than the average variable cost $42, therefore the firm should not shutdown.

Now ,the average variable cost increase by $9, then the new average variable cost will be ($42+$9) = $51.

Here the average cost would increase due to increase in the variable cost.While increase in the average variable cost now, under the condition the average variable cost is exceeds the marker price($50),therefore the firm will decide to shut down.