Question

If the market price of a product is between the minimum average variable cost (AVC) and minimum average total cost (ATC) of a firm, that firm will:___________
a) always shut down.
b) always continue to produce.
c) produce in the short run but shut down in the long run.
d) produce in the long run but shut down in the short run.
e) make positive economic profits.

Answer 1

Answer:

c) produce in the short run but shut down in the long run.

Explanation:

Option C is correct because the price charged is above the average variable cost which means the firm is still covering its variable cost of production. Moreover, if the firm still continues the same in the long run then it will shut down its operation. But if the price charged is below or equal to average variable cost then the firm will shut down its production even in the short run.