a) What would you advise the firm to do? A. It should close in both the short an

Question

a) What would you advise the firm to do?
A. It should close in both the short and long run.
B. The firm is producing where MC=MR, so it should stay in business in both the short and long runs.
C. As long as average variable costs are less than $2, in the short run it should stay in business. In the long run it should close.
D. The firm should close in the short-run. Once it can recoup its fixed costs, it should re-open in the long-run.

b) What would you advise the firm to do if you knew average variable costs were 4?
A. It should close in the long run, but not the short run since it is covering average fixed costs.
B. It should close in both the short and long run.
C. The firm should close in the short run. Once it can recoup its fixed costs, it should re-open in the long run.
D. The firm is producing where MC=MR, so it should stay in business in both the short and long runs.

Explanation / Answer

If price exceeds average total cost, then a firm generates an economic profit, that is, above normal profit, by producing at the quantity that equates marginal revenue and marginal cost. if price falls below average total cost, then the firm incurs an economic loss. The question is whether the firm should keep producing in the short run and incur an operating loss or shut down awaiting a higher price. If price remains above average variable cost, then the firm generates enough revenue to pay all variable cost, plus a portion of fixed cost. So it produces the quantity that equates marginal revenue and marginal cost. here price price If the price falls below average variable cost, then the firm is better off shutting production in the short run. so , for (b) c option is answer

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