question archive Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and the market price is expected to rise at least to ATC in the near future
Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and the market price is expected to rise at least to ATC in the near future
Subject:MarketingPrice:2.88 Bought17
Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price taker would
a. immediately shut down and get out of the industry.
b. continue to produce a quantity such that marginal revenue equals marginal cost.
c. cut price and expand output in hopes of achieving economies of scale I
d. shut down temporarily in hopes of restarting in the near future.
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b. continue to produce a quantity such that marginal revenue equals marginal cost.
Reason: Currently the firm is able to operate at the level where it is able to cover up its average variable cost, even when it is suffering losses. This will provide an incentive for the firm to continue its operations till the point where it manages to cover its variable cost. A firm decides to shut down its operations only when it is not even able to cover the variable cost. So in this case the firm being a price taker, will set its output at the loss minimising output level which happens at the point where marginal cost is equal to marginal revenue.
