Question

Equilibrium price is $10 in a perfectly competitive market.For a perfectly competitive firm,MR = MC at 1,200 units of output.At 1,200 units,ATC is $23,and AVC is $18.The best policy for this firm is to __________ in the short run.Also,this firm earns __________ of __________ if it produces and sells 1,200 units.
A) shut down; losses; $15,600
B) shut down; losses; $9,600
C) continue to produce; losses; $15,600
D) continue to produce; profits; $15,600

Answer 1

Answer:

A) shut down; losses; $15,600

Explanation:

A perfect competition is characterised 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. Firms earn zero economic profit in the long run.

If in the short run, price is less than average variable cost, the firm should shut down. In this question, price ($10) is less than average variable cost ($18). The firm should shut down in the short run.

Profit or loss = Total revenue - Total cost

($10-$23) x 1200 = -$15,600

The firm is earning a loss because average total cost in greater than price.

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