Question

Consider a profit-maximizing firm in a competitive industry. Under which of the following situations would the firm choose to produce where MR= MC?

Yes?/No? Minimum AVC < Price < minimum ATC.
Yes?/No? Price > minimum ATC.
Yes?/No? Price < minimum AVC

Answer 1

The answer is given below

Step-by-step explanation:

A firm maximizes profit to produce where the marginal revenue is equal to the marginal cost provided that the price of the product is greater or equal to the average variable cost (AVC)

i) Minimum AVC < Price < minimum ATC

Id the price is greater than the minimum average variable cost (AVC) and less than the minimum average total cost (ATC), the firm would produce only for the short run making small losses.

ii) Price > minimum ATC.

Yes the firm should produce when Price > minimum ATC.

iii) Price < minimum AVC

When Price < minimum AVC, the firms should stop producing and shut down because it cannot cover its variable cost.