Figure 9-4

Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 9-4.If the market price is $30,should the firm represented in the diagram continue to stay in business?

Question

Figure 9-4
  
Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 9-4.If the market price is $30,should the firm represented in the diagram continue to stay in business?

Quizplus · Accepted Answer

At a price of $30, the firm is producing a quantity where its average variable cost (AVC) is below the market price, but its average total cost (ATC) is still above the market price. This means that the firm is not making a profit (since the price is below the ATC), but it is covering some of its fixed costs (since the price is above the AVC). Therefore, the best choice is C, because the firm should continue to stay in business in the short run, as long as it is covering its variable costs and contributing towards its fixed costs. However, it may want to consider exiting the market in the long run if it cannot earn a profit.

Figure 9-4 Figure 9-4 Shows the Cost and Demand Curves for a and Demand