Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC), and the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price taker would:
A) immediately shut down and get out of the industry.
B) continue to produce a quantity such that marginal revenue equals marginal cost.
C) shut down temporarily, in hopes of restarting in the near future.
D) cut price and expand output in hopes of achieving economies of scale

Question

Quizplus · Accepted Answer

If the market price is above the minimum average variable cost, the firm would incur less loss by producing than shutting down. If the market price is expected to rise at least to ATC in the near future, the firm may continue to operate in the short run by producing at a quantity where marginal revenue equals marginal cost. However, if the market price remains below ATC for a longer period, the firm may have to shut down in the long run. Option A is not appropriate as it would result in immediate losses. Option C may be appropriate if the firm has a high potential for restarting in the near future. Option D is not appropriate as lower prices would further decrease the profit margins.

Suppose That Price Is Below the Minimum Average Total Cost