Say a competitive firm is producing at point where ATC = $10, AVC = $2. If the firm charges $5 for its output, then in the short-run this firm should

Question

Quizplus · Accepted Answer

In the short-run, a competitive firm should continue to operate as long as the price charged (which is $5 in this case) is greater than the Average Variable Cost (which is $2 in this case). This is because, in the short-run, the fixed costs are already sunk and cannot be recovered by shutting down production, so the firm will minimize losses by continuing to operate at a price above their AVC. Thus, the correct choice is to continue to operate.

Say a Competitive Firm Is Producing at Point Where ATC