As manager of a company that is trying to maximize long-run profit, which of the

Question

As manager of a company that is trying to maximize long-run profit, which of the following
is a rational profit-maximizing business decision?
a. In the long run, shut down the business if price falls below long-run average costs.
b. In the long run, shut down the business if price falls below short-run average variable
costs.
c. In the short run, shut down the business if price falls below average costs.
d. In the short run, shut down the business if price is not high enough to cover fixed costs.

Explanation / Answer

The answer is (a) because normal profit is at a point where Long- run Average Cost(LAC) equal Price (P). At this point, the business cannot be expanded and all resources have been fully utilized. Unlike in the short-run where variable factors can be adjusted.

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