Suppose a perfectly competitive firm is in the following situation: P = $10; output = 3,000; ATC = $11; MC = $10; and AVC = $7.50. Which statement is an accurate description of the firm's situation?

Question

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The firm is selling its output at the market price ($10) which equals its marginal cost (MC), indicating it is producing at the profit-maximizing (or loss-minimizing) level of output. However, because the average total cost (ATC) is $11, which is higher than the market price, the firm is incurring a loss. The fact that the price is above the average variable cost (AVC) of $7.50 means the firm is covering its variable costs and some of its fixed costs, so it should not shut down in the short run.

Suppose a Perfectly Competitive Firm Is in the Following Situation