If at the MC = MR output, AVC exceeds price,
A) new firms will enter this industry.
B) the firm should produce the MC = MR output and realize an economic profit.
C) some firms should shut down in the short run.
D) the firm should expand its plant.

Question

Quizplus · Accepted Answer

If AVC exceeds price at the MC=MR output, it means that the firm is not making enough revenue to cover its variable costs. In this case, the firm should shut down in the short run, as continuing to operate would mean incurring losses. This will also lead to a reduction in the supply of the good and eventually push prices up to a level where the remaining firms can cover their costs. A new firm entering the industry or expanding the plant is not a viable option in the short run as it would only worsen the situation for the existing firms. The firm should produce the MC = MR output only if price is equal to or greater than AVC at that level of output.

If at the MC = MR Output, AVC Exceeds Price