The figure to the right represents the cost structure for a perfectly competitiv

Question

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00 MC ATC 30.0 28 26 24 22.0 20.0 Suppose the market price is $17.00 per unit. Characterize the firm's profit. If the firm produces output, then it will Should the firm instead shut down in the short run? In the short run, the firm should AVC (experience losses, break even, make profit) 16 14 12.0 10 0 A. continue to produce because price is greater than average fixed cost. 0 B. shut down because price is less than fixed costs 8.0 6 4 C. shut down because price is greater than average variable cost. D. shut down because price is less than average total cost. 0.0 0 1 23 45 678 Quantity 0 E. continue to produce because price is greater than average variable cost.

Explanation / Answer

Answer
if the firm produces, then it will experience losses
because the profit=(P-ATC)*Q
here, P<ATC so the firm earns losses.
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No, because the firm is minimising losses at this price,
if the firm shut down then the loss is equal to fixed cost=$50
if the firm produce loss is=(25-17)*4.25=34 (approximately)
o the loss is lower if the firm produces so the firm should not shut down in short run.
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option E
because the price is above variable cost which means the firm is covering some portion of the fixed cost.

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