Suppose that at 500 units of output, marginal revenue is equal to marginal cost. The firm is selling its output at $5 per unit, and average total cost at 500 units of output is $6. On the basis of this information, we
A) can say that the firm should close down in the short run.
B) can say that the firm can produce and realize an economic profit in the short run.
C) cannot determine whether the firm should produce or shut down in the short run.
D) can assume the firm is not using the most efficient technology.

Question

Quizplus · Accepted Answer

We cannot determine whether the firm should produce or shut down in the short run. While the marginal revenue equaling marginal cost indicates that the firm is maximizing profits, the fact that the average total cost is higher than the price they are selling their output for means they are not covering all of their costs. To determine whether they should shut down or not, we would need additional information about the firm's fixed costs and whether they would be better off shutting down and paying those costs or continuing to produce and try to cover them in the long run.

Suppose That at 500 Units of Output, Marginal Revenue Is