Mrs.Smith is operating a firm in a competitive market.The market price is $6.50. At her profit-maximizing level of output,her average total cost of production is $7.00 and her average variable cost of production is $6.00.

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In the short run, Mrs. Smith should continue to operate even though she is earning a loss. This is because her marginal revenue, which is equal to the price in a competitive market like this, is still greater than her average variable cost. By continuing to operate, she can at least cover her variable costs and contribute towards her fixed costs. If she shuts down, she will still have to pay her fixed costs which will result in a greater loss. However, in the long run, Mrs. Smith will need to consider whether it is feasible to stay in business and make changes to reduce her costs or improve her products.

MrsSmith Is Operating a Firm in a Competitive Market