Your average total cost is $38; the price you receive for the good is $15. Shoul

Question

Your average total cost is $38; the price you receive for the good is $15. Should you keep on Producing the good? Why? You should Produce in the long run as long as you are only earning small losses. It is always possible to make up a small loss. You should continue Producing in the long run because you are earning an economic Profit Maybe, it depends on whether you are converting average variable costs in the long run. You should not Produce in the long run because you are earning an economic loss. All inputs are Variable in the long run So you can go out of business.

Explanation / Answer

If average total cost is more than the price then the firm is incurring a loss or a negative economic profit.

Your Average Total Cost is $38; the price you receive for the good is $15. Should you keep in producing the good? Why?

You should not produce in the long run because you are earning an economic loss. All inputs are variable in the log run so you can go out of business.

A firm is earning an economic profit if Price is more than the Average Total cost. In the given scenario the Average total cost is more than the price so the company is earning a negative economic profit. If Price < Long Run Average Cost the firm will shut down and exit the market.

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