Use the figure to answer the following question(s).
Figure 9-5

If the market price in Figure 9-5 fell to $2.50, what should the firm do?
A) raise its price
B) shut down and wait for conditions to improve
C) continue operating in the short run if it expects conditions to improve
D) go out of business immediately

Question

Use the figure to answer the following question(s).
Figure 9-5

If the market price in Figure 9-5 fell to $2.50, what should the firm do?
A) raise its price 
B) shut down and wait for conditions to improve 
C) continue operating in the short run if it expects conditions to improve 
D) go out of business immediately

Quizplus · Accepted Answer

The firm should continue operating in the short run if it expects conditions to improve. In the short run, the firm is making a profit (where MR=MC), but the price is not high enough to cover its average variable costs (AVC). However, since the price is still above its average fixed costs (AFC), the firm should continue operating in the short run, since it can at least cover some of its costs. If the firm expects conditions to improve in the future (which is likely if the market price has fallen), it can continue operating in the short run and wait for prices to increase. If the firm were to shut down, it would still have to pay its fixed costs, and it would not be able to generate any revenue to help offset these costs. Therefore, the best choice is C: continue operating in the short run if it expects conditions to improve.

Use the Figure to Answer the Following Question(s)