Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
A)minimizes losses by producing at the minimum point of its AVC curve.
B)maximizes profits by producing where MR = ATC.
C)should close down immediately.
D)should continue producing in the short run but leave the industry in the long run if the situation persists.

Question

Quizplus · Accepted Answer

When the price of a product is above the minimum average variable cost (AVC) but below the average total cost (ATC), the firm covers its variable costs and part of its fixed costs, minimizing losses by continuing production in the short run. However, if this situation persists in the long run, the firm cannot cover all its costs, including fixed costs, and should exit the industry.

Suppose a Firm in a Purely Competitive Market Discovers That