Suppose you find that the price of your product is less than minimum AVC. You should
A) minimize your losses by producing where P = MC.
B) maximize your profits by producing where P = MC.
C) close down because, by producing, your losses will exceed your total fixed costs.
D) close down because total revenue exceeds total variable cost.

Question

Quizplus · Accepted Answer

If the price of the product is below the minimum AVC, it means that the firm is not covering its variable costs of production. If the firm continues to produce, it will incur losses greater than its fixed costs. Therefore, the best choice is to shut down the production in the short run to minimize the losses. This is because in the short run, fixed costs cannot be avoided or recovered, and the firm will be better off cutting its losses than continuing to produce a product that is not profitable.

Suppose You Find That the Price of Your Product Is