The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hires you to give him economic advice. He tells you that the market price for his shirts is $15 and that he is currently producing 200 shirts at an AVC of $10 and an ATC of $20. What would you recommend that he do?
A) Continue producing in the short run, as his loss from production is less than his fixed costs, but exit the industry in the long run if there are no changes in economic conditions.
B) Shut down in the short run, as he is incurring a loss, and leave the industry in the long run, if there are no changes in economic conditions.
C) Continue to produce in the short run, even though he is earning a loss, and expand production in the future hoping to increase market share and total revenue.
D) Tell him that you cannot make any recommendations until you know what his fixed costs are.

Question

Quizplus · Accepted Answer

In the short run, the firm should continue producing as long as the price covers the average variable cost (AVC), which is $10, even though the average total cost (ATC) is $20, indicating a loss. This is because by continuing to produce, the firm can cover its variable costs and contribute to fixed costs, minimizing losses compared to shutting down immediately. However, if the situation doesn't improve, exiting the industry in the long run would be advisable since the firm cannot cover its total costs in the long term at the current price.

The Owner of Tie-Dyed T-Shirts, a Perfectly Competitive Firm, Hires