Question

When price is less than average variable cost at the profit-maximizing level of output, a firm should ________.

A) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run.B) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.C) shutdown, because it will lose nothing in that case.D) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run.

Answer 1

.B) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.

Step-by-step explanation:

In a competitive market, the firm maximize it's profit when the market price of the firm is equal to average variable cost of the firm so that the firm earns normal profits in the long run.

Therefore, if price is less than the average variable cost then the firm should shutdown because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.