Question

The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advice. He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts at an AVC of $15 and an ATC of $25. What would you recommend to him

Answer 1

To continue producing in the short run, as his loss from production in the short run is less than his fixed costs (or price is greater than AVC), but to exit the industry in the long-run if there are no changes in economic conditions.

Reason

Since fixed cost is sunk cost, one can not recover it even if it decides to shut down, so it is for the firm's best interest not to shut down in the short run.