Question

T-shirt Enterprises is selling in a purely competitive market, it is producing 3000 units, selling them for $2.00 each. At this level of output, the ATC is 2.50 and the AVC is $2.20. Based on these date, the firm should

Answer 1

T-Shirt Enterprises should continue producing in the short run as the market price covers the average variable costs but not the average total costs, minimizing losses compared to ceasing production.

Step-by-step explanation:

T-Shirt Enterprises, operating in a purely competitive market, is currently producing and selling its garments at a situation where the price per unit ($2.00) is less than the average total cost (ATC) of $2.50 but is above the average variable cost (AVC) of $2.20. According to economic principles, if a firm's market price is greater than its AVC but less than its ATC, then it should continue to produce in the short run, despite making economic losses, as it can still cover its variable costs and contribute to fixed costs.

Operating in this manner, its losses are minimized compared to ceasing production entirely, which would still incur fixed costs. Hence, for the given output level, the firm does not achieve profit maximization but prevents larger financial losses by continuing to operate in the short run.