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In: Economics

​Initially, the market price is pequals19​, and the competitive​ firm's average variable cost is 18​, while...

​Initially, the market price is pequals19​, and the competitive​ firm's average variable cost is 18​, while its average cost is 21. Should it shut​ down? ​ Why? This firm should

A. shut down because average cost is greater than the market price. B. not shut down because average fixed cost is less than the market price. C. shut down because average fixed cost is less than the market price. D. not shut down because average variable cost is less than the market price. E. not shut down because average cost is greater than average variable cost.

Solutions

Expert Solution

Answer : The answer is option D.

The firm's shutdown point is that point where Price = Average Variable Cost. Here firm's price level is $19 and average variable cost is $18. As here the price is greater than the average variable cost hence the firm should not shutdown it's production although the firm faces loss. Therefore, option D is correct.

Rahul Sunny answered 2 years ago
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