Question

Consider a firm that has short-run AVC of $1.50 and short-run AFC of $1. If the firm can charge a price of $1.75 per unit sold then the firm should

produce in both the SR and the LR

produce in the SR but not the LR

exit

shut down

Answer 1

Answer:

If produced in short run or long run

In short run, to produce any level of product firm 's price must cover variable cost

Here Price $ 1.75> AVC $1.50

Thus firm should produce in short run,

But for long run to continue produce Price > ATC

Price is $1.75$ & ATC is $2.50.

Thus firm should produce in short run but not in long run

For decision of shut down, if P < AVC , then we should do shut down

Here price is greater than AVC so no need to shut down in short run

For decision of exit, if P < ATC, we should exit

Here price is less than, so we should exit in long run