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 28 26 24 Suppose the market price is $13.00 per unit. Characterize the firm's profit. If the firm produces output, then it will experience losses Should the firm instead shut down in the short run? In the short run, the firm should AVC 20 18 16 o 14 12 10 ( A. shut down because price is less than fixed costs O B. continue to produce because price is less than average variable cost. C. continue to produce because price is greater than ( D. shut down because price is less than average total 0 E. shut down because price is less than average Quantity average fixed cost. cost. variable cost.

Explanation / Answer

Answer
Experience losses
because the price is below average total cost
profit=(P-ATC)*Q
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yes, it should
option E

The firm can minimize losses by shutting down because the firm is producing below average variable cost
the loss without production is equal to fixed cost and with production, it is equal to
=FC+(AVC-P)*Q
here the AVC>P so the loss increases.

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