Question

T-Shirt Enterprises is selling in a purely competitive market. It is producing 3,000 units, selling them for $2.00 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20. Based on these data, the firm should

Answer 1

Answer:

shutdown in the short run

Explanation:

A perfect competition is characterized by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.  

In the long run, firms earn zero economic profit.  If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.  

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.  

A firm should shut down in the short run if price is less than average variable cost.

for T-Shirt Enterprises, price is $2 which is less than average variable cost