At the point at which P=MC,suppose that a perfectly competitive firm's MC = $100,its AVC = $80 and its AC = $110.This firm should
A)shut down immediately.
B)continue operating in the short run.
C)try to take advantage of economies of scale.
D)try to increase its advertising and promotion.

Question

Quizplus · Accepted Answer

At the point where P=MC, the firm should continue operating in the short run as it can cover its variable costs (VC) and make some contribution towards its fixed costs (FC). In this case, the firm's AVC is $80, which means that it can cover its variable costs and make a contribution towards its fixed costs by operating. If the firm shuts down immediately, it will incur a loss equal to its fixed costs of $110. Therefore, continuing to operate in the short run is the best choice for the firm in this scenario. The options of taking advantage of economies of scale and increasing advertising and promotion are not relevant in this scenario.

At the Point at Which P=MC,suppose That a Perfectly Competitive