Final answer:
When marginal cost equals average total cost at the profit-maximizing quantity, the business is at the zero profit point and should continue producing. If the price is above the average variable cost, the firm covers its costs and avoids losses, making it preferable to continue in the short run. The long-run strategy would depend on whether economic profits are achievable through entry or exit adjustments in the market.
Step-by-step explanation:
If the marginal cost and average total cost are equal to each other at the profit-maximizing quantity, the business is operating at the 'zero profit point.' This suggests that the firm is covering all its costs, including its opportunity costs, and earning normal profits (or zero economic profits). A firm should continue to produce as long as the market price is equal to or greater than average variable costs.
Should the market price drop below the average variable cost, the firm would be better off shutting down since it cannot cover its variable costs. However, if the market price is above average variable cost but below average total cost, the firm should still produce in the short run as it is able to cover its variable costs and contribute to some of its fixed costs, although it should plan to exit in the long run as it is not sustainable. The firm should not shut down immediately as it would be able to minimize its losses compared to shutting down and would still be better off producing than not producing at all.
In the long run, if a firm continues to make zero economic profits, no changes in production are generally required. Through the process of entry and exit, the market price will adjust, allowing firms to continue making zero economic profits. Therefore, the firm should continue producing at the profit-maximizing quantity.