Question

he equilibrium price at which a perfectly competitive firm sells its good is $5. The profit-maximizing quantity of output is 70 units. At this quantity of output, the firm has an average fixed cost of $2 and an average variable cost of $7. In the short run, this perfectly competitive firm should .

Answer 1

Price is greater than the average variable cost in the short run the firm will Continue to operate.

Step-by-step explanation:

Total Revenue = price quantity sold = $5 × 70

= $350

Total Cost = (Average variable cost + Average fixed cost) × Quantity

= ($7 + $2) × 70

= $9 × 70

= $630

Therefore,The total revenue of the company is less than its total cost which means that the company is incurring losses. However, a firm should function in the short run as long as its price meets the average cost of the product.

In this case, the price is 5 dollars and the average variable cost is 7 dollars. So, price is greater than the average variable cost in the short run the firm will Continue to operate.