) Consider Exhibit 102.If the firm is charging price P* for output q*, then inorder to minimize loss in the short run, the firm should
A)shut down because price is greater than average variable cost
B)shut down because price is greater than marginal cost
C)shut down because price is less than average variable cost
D)continue to produce because price is greater than average variable cost
E)continue to produce because price is greater than marginal cost

Question

)  Consider Exhibit 10­2.If the firm is charging price P* for output q*, then inorder to minimize loss in the short run, the firm should
A)shut down because price is greater than average variable cost 
B)shut down because price is greater than marginal cost 
C)shut down because price is less than average variable cost 
D)continue to produce because price is greater than average variable cost 
E)continue to produce because price is greater than marginal cost

Quizplus · Accepted Answer

In the short run, the best decision for the firm is to minimize losses. From the exhibit, we can see that at the output level q*, the price charged by the firm is equal to the average variable cost (AVC) and is greater than the average cost (AC). This implies that the firm is covering all of its variable costs and a portion of its fixed costs, resulting in a loss. However, shutting down the operations entirely would result in incurring fixed costs as well, which would increase the loss. Thus, the best choice for the firm is to continue producing at q* and minimize losses in the short run. Therefore, the correct choice is D - continue to produce because price is greater than average variable cost.

) Consider Exhibit 10­2

) Consider Exhibit 102