Question

Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?

• A. The firm should shutdown in order to minimise its losses.
• B. The firm should raise its price enough to cover its losses.
• C. The firm should move its resources to another industry.
• D. The firm should continue to operate in the short run.

Answer 1

The correct option is D The firm should continue to operate in the short run.

In a competitive market, the firm maximize it's profit when the market price of the firm is equal to average variable cost of the firm so that the firm earns normal profits in the long run.

Therefore, the firm should increase its output in the short run.