Which of the following best states why why in the short run a firm may decide...

Which of the following best states why why in the short run a firm may decide to continue to produce, even with economic losses? Select one:

a. Price is greater than average variable cost but less tha average total cost

. b. Total revenue is greater than total variable cost but less than total cost.

c. All of the above are reasons for continuing production.

d. One of the above is incorrect. e. Economic losses areless than fixed cost.

Expert Solution

Option c

option a, b and e is correct

A firm produces in the short run if the price is between ATC and AVC

suppose P=10, AVC=8, and ATC=12 and Q=10 then fixed cost =(12-8)*10=40

now suppose the firm operates

Loss=(ATC-P)*Q=(12-10)*10=$20

If shutdown then

Loss=fixed costs=$40

so the firm operates to minimize losses when the P>AVC

also, P>AVC means total revenue is greater than total variable costs

and the Economic losses areless than fixed cost

Rahul Sunny answered 2 years ago

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