When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output,a firm should:

Question

Quizplus · Accepted Answer

If a firm is producing at a level where price is greater than average variable cost but less than average total cost, it is still covering its variable costs but not its fixed costs. This means that it is not making a profit, but it is not losing money on every unit produced either. Therefore, the best option for the firm is to continue producing at this level of output where marginal revenue equals marginal cost, as this will allow it to at least cover its variable costs and contribute towards covering its fixed costs. This is because shutting down or reducing output further would result in even greater losses, while increasing output would lead to even higher fixed costs that the firm cannot cover.

When Price Is Greater Than Average Variable Cost but Less