Question

If AVC < P <SAC, then a firm must

• A. shut down
• B. produce at output level corresponding to MR=MC
• C. produce at output level corresponding to MR=minimum of AVC
• D. produce at output level corresponding to MR= minimum of SAC

Answer 1

The correct option is B

produce at output level corresponding to MR=MC

If AVC < P <SAC, then a firm must produce at an output level corresponding to MR=MC. In the short run, fixed costs are sunk costs and as long as P>AVC the firm must produce at output level corresponding to MR=MC to minimize losses.