Consider a firm with the following cost and revenue information: ATC = $8, AVC = $6, MR = $6 and MC = $6. If the firm produces Q = 60 units in the short run, it:
A) is minimising losses.
B) makes a total loss of $60.
C) should produce more output.
D) is indifferent concerning whether to keep operating or shut down.

Question

Quizplus · Accepted Answer

In the short run, a firm should continue to operate as long as it can cover its variable costs. In this case, the AVC is $6 and the price received for each unit is also $6, which means the firm is just covering its variable costs. However, the firm is not covering its fixed costs, which means it is making a total loss. Nonetheless, in the short run, the firm should continue to produce and sell its output as long as it is covering its variable costs. Therefore, the best choice is D, as the firm is indifferent about whether to keep operating or shut down, but it should continue to operate in the short run.

Consider a Firm with the Following Cost and Revenue Information