Question

"Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should"

Answer 1

Answer:

Mrs.Smith should continue to operate the business in the short run but shut down in the long run.

Explanation:

According to the shut down rule, at the profit-maximizing positive level of output, a business in a competitive market should continue to operate in the short-term if the price equals to or is greater than the average variable cost, but should shut down in the long term if the price is less than or equal to total cost. Here,

price = $8.10

avg variable cost = $8.00

avg total cost = $8.25

Mrs.Smith should continue to operate the business in the short run but shut down in the long run.

Answer 2

Answer:

Short-run continue to operate Long turn. decreases cost or leave the market

Explanation:

Mrs Smith will shut-down the business if it cannot cover their variable cost given the current selling price ( This means, given Mr Smith cost structure it cost more to produce it that than to purchased it)

gross profit ( check if profitable in the long-run)

sales price $8.10 - $8.25 total variable cost= -0.15 producing a unit in the current cost structe generates losses for 15 cent in the bottom line

contibution ratio (check for wheather the product is profitable or not in the short run)

sales price $ 8.10 - $ 8.00 variable cost = $0.10 contribution

As the product generates a contribution their volume makes the bottom of the line better If we don't produce it we are going to decrease our losses even more.

We have to produce and improve our situation by some of these measurements:

• decrease our variable cost (anytime)

• decrease our fixed cost (in the long turn as currently are fixed)

• increase selling price if possible