Question

suppose you are a consultant for a firm that is perfectly competitive. the firm is worried only about its policies in the short run, what would you reccomend in terms of quantity changes (raise, cut, shut down or stay put) and price changes (raise, cut, or stay put) in each of the following situations

a. P= $34 MC = $56 AVC= $12

b. P= $270. MC= $300 AVC= $300

c. P= $151 MC= $151 AVC= 150

d. P= $316 MC= $311 AVC=$266

e. P=256 MC=256 AVC= $266

Answer 1

Ans. In part b and part e , firms should shut down because AVC > P which means firms aren't able to cover even their variable costs.

In part a , firm should produce less because P or MR is less than MC .

In part c , firm should stay put because P or MR is equal to MC.

In part d , form should produce more because MR is greater than MC.

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