If a firm decides to make the investment decision to expand its capacity,then it must have discovered that

Question

Quizplus · Accepted Answer

The decision to expand capacity is an indication that the firm is currently operating below its optimal level of output, and increasing capacity will allow it to produce more goods and services at a lower average cost. For the firm to make a profit, the price of its output (P) must be greater than its average total cost (ATC), since this will allow the firm to cover all its costs and earn a profit. Therefore, the correct choice is C: P > ATC. Option A is incorrect because P = ATC only allows the firm to break even, while option B is incorrect because P > AVC only allows the firm to cover its variable costs, but not its fixed costs.

If a Firm Decides to Make the Investment Decision to Expand