A firm in a competitive industry faces the following short-run cost and revenue conditions: ATC = $16; AVC = $8; and MR = MC = $12. This firm should

Question

Quizplus · Accepted Answer

The firm should continue to operate at the same price and output level in the short run. This is because the MR is equal to MC. In other words, the firm is generating enough revenue to cover its variable costs and contribute towards the fixed costs. Since the price paid by the customers is higher than the AVC, the firm is making a positive contribution to the overhead costs as well. Therefore, it is better to continue operating in the short run and cover the fixed costs, rather than shutting down and incurring losses.

A Firm in a Competitive Industry Faces the Following Short-Run