If market price is below a competitive firm's average total cost,the firm should:
A)shut down only if the price is above its average variable cost.
B)shut down immediately.
C)remain open as long as its average revenue is greater than its average variable cost.
D)expand output in the short-run and expand its production capacity.

Question

Quizplus · Accepted Answer

If a competitive firm's market price falls below its average total cost, it is not profitable for the firm to produce in the short-run. However, shutting down immediately is not the best option, as the firm would still have to pay the fixed costs. In this case, the firm should continue to operate as long as its average revenue is greater than its average variable cost, as it can at least cover its variable costs and partially offset its fixed costs. Therefore, choice C is the best option.

If Market Price Is Below a Competitive Firm's Average Total