If the market price is equal to the average variable cost, the firm should:
A) keep operating or shut down.
B) increase the output.
C) change fixed inputs.
D) increase the price.

Question

Quizplus · Accepted Answer

If the market price is equal to the average variable cost, the firm is just covering its variable costs and not earning any profit. In such a scenario, the firm should keep operating in the short run if the price is covering its variable costs (AVC), but it should shut down in the long run since it cannot even cover its fixed costs. Hence, option A is the best choice. The firm should continue to operate for some time and wait for the market price to increase or reduce its variable costs to make profits in the long run. Increasing output, changing fixed inputs, and increasing price would not be the best choices in this situation.

If the Market Price Is Equal to the Average Variable