which of the following is correct and why? thanks :) 30. Suppose a firm is curre

Question

which of the following is correct and why? thanks :)

30. Suppose a firm is currently producing 100 units and the average variable cost of production is $4. Further suppose that the average fixed costs are $7, and the firm is receiving $10 for each unit. Assuming that these conditions remain the same, the firm should shutting down means to produce no output in the short run while exit refers to leaving the industry entirely. in the short run and in the long run. Recall that a) shut down; exit b) not shut down; exit c) shut down; not exit d) not shut down; note xit

Explanation / Answer

Answer

b

the average variable cost is below price so the firm should produce because it will minimize losses.

if the firm produces the loss is

=(P-AVC-AFC)*Q=(10-7-4)*100=-100

The loss if shut down=fixed cost=AFC*Q=4*100=400

and in the long run, there is no variable cost and the firm exit if the price is below ATC

ATC=AVC+AFC=7+4=$11

so the firm will exit in the long run if the condition persists

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