Question

In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC =$5.15. A. In the short run firms will shut down, and in the long run firms will leave the market. B. In the short run firms will continue to operate, but in the long run firms will leave the market. C. New firms will likely enter this market to capture any remaining economic profits. D. The firm will earn zero profits in both the short run and long run.

Answer 1

Answer: Option (A) is correct.

Step-by-step explanation:

Correct option: In the short run firms will shut down, and in the long run firms will leave the market.

In the current market scenario, current price is $5, average total cost is $5.50 and average variable cost is $5.15. We know that the average total cost is the sum of average fixed cost and average variable cost. In this situation, both average total cost and average variable cost is greater than the current price.

So, it is better for the firm to shut down its operations in the short run as it will incurred the losses and also leave the market in the long run.