Question

Industry Firm SP MC ATC X -P=MR AVC 35.61. .. 10,000 10 16 18 Answer the following question based off of the graphs above, which depict a perfectly competitive industry and firm. Assume that fixed costs (FC) for the firm are $400: Does the firm continue to operate given the information presented in the graph? When would a firm shut down? The firm continues to operate in the short run; A firm would shut down in the short run if the price fell below $35.6 because the losses would be greater than the fixed costs of $400 O The firm continues to operate in the short run; A firm would shut down in the short run if the price fell below $70 because the losses would be greater than the average variable costs O The firm continues to operate in the short run; A firm would shut down in the short run if the price fell below $35.6 because the losses would be greater than the average variable costs O The firm shuts down immediately; A firm would shut down in the short run if the price fell below $35.6 because the losses would be greater than the fixed costs of $400

Answer 1

Answer
Option 1

the firm produces at MR=MC if the P>AVC
P=70 so the firm produces in the short run to minimize losses as it will shut down if the losses are above fixed costs and that is possible if the price is below minimum AVC cost

P=70
Q=16, ATC=82
Loss=(ATC-P)*Q=(82-70)*16
=192
so the loss is below $400=fixed costs