In the short-run, production should be stopped whenever: a. Expected selling price is less than average...

In the short-run, production should be stopped whenever: a. Expected selling price is less than average total cost. b. Expected selling price is less than average variable cost. c. Expected selling price is equal to marginal revenue. d. Expected selling price is greater than average total cost.

Expert Solution

The correct answer is (b) Expected selling price is less than average variable cost

In the short run firms incur fixed cost which is not recoverable in the short run.

Profit = Total Revenue(TR) - Total cost(TC) and Total cost(TC) = total variable cost(TVC) + Total Fixed cost(TFC)

=> Profit = TR - TC = TR - (TVC + TFC)

So If In the short run firm choose to shut down then it will still incur total fixed cost.

=> Profit in the short run = -TFC If he chooses to shut down because there will be no Quantity produced(Q) i.e. Q = 0 and as no quantity produced, TR = Price*quantity = 0 and TVC = 0 when Quantity = 0

Profit in the short run = TR - (TVC + TFC) If he chooses to Produce

Hence He should shutdown If -TFC > TR - (TVC + TFC)

=> TVC > TR

TVC = Average Variable cost*Quantity and TR = Price *quantity

=> production should be stopped in the short run if TVC > TR

=> Average Variable cost*Quantity > Price *quantity

=> Average Variable cost > Price

Hence, production should be stopped if one expects price to be lesser than the average variable cost

Hence, the correct answer is (b) Expected selling price is less than average variable cost

Rahul Sunny answered 1 year ago

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