Question

Mrs. Smith operates a business in a competitive market. The current market price is $7.50. 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 (Points : 5)
a.shut down her business in the short run but continue to operate in the long run.b.continue to operate in the short run but shut down in the long run.c.continue to operate in both the short run and long run.d.shut down in both the short run and long run.

Answer 1

Answer:

Option (D) is correct.

Explanation:

Given that,

Current market price = $7.50

Average variable cost = $8.00

Average total cost = $8.25

It can be seen from the above information that current market price is less than the average variable cost, i.e, $7.50 < $8.00.

Mrs. Smith should shut down its production in the short run as well as in the long run until the point where current market price is greater than or equal to average variable cost.