Mrs.Smith operates a business in a competitive market.The current market price is $8.50,and at her profit-maximizing level of production,the average variable cost is $8.00,and the average total cost is $8.25.Which of the following statements about Mrs.Smith's firm is correct?

Question

Quizplus · Accepted Answer

Mrs. Smith should continue to operate in both the short run and long run. This is because the market price is greater than the average variable cost, which means that the firm is making a positive contribution towards paying off its fixed costs. In the short run, Mrs. Smith may not be making a profit, but she is covering her variable costs and some of her fixed costs. In the long run, it is possible that the market price may increase, allowing Mrs. Smith to make a profit. Therefore, the best choice is option C.

MrsSmith Operates a Business in a Competitive Market