Question

In the short run, the firm will:

a. Shut down if the price falls below p3.
b. Continue to produce as long as the price is greater than p1.
c. Continue to produce as long as the price is greater than p2.

Answer 1

In the short run, a firm will shut down if the price falls below its average variable costs (p2), continue production if the price is between AVC and where MC crosses AC, and earn profits if the price is above where MC crosses AC. The firm will not shut down as long as the price is above p2.

Step-by-step explanation:

The question at hand deals with the firm's short-run production decision in the context of microeconomic theory. This involves determining the price levels at which a firm decides to either continue production or shut down to minimize losses. It boils down to comparing price levels to the average variable cost (AVC) and marginal cost (MC).

Given the provided reference information:

1. If price falls below AVC, the firm should shut down to minimize losses.
2. If price is between AVC and where MC crosses AC (break-even point), the firm makes a loss but should continue production because it covers variable costs.
3. If price is above where MC crosses AC, the firm will earn profits.

Therefore, the correct option in the final answer is: the firm will continue to produce as long as the price is greater than p2, assuming p2 represents the point where price equals AVC.