When price exceeds average variable cost but not average total cost,the firm should,in the short run,
A)Shut down.
B)Produce at the rate of output where MR = MC.
C)Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run.
D)Minimize total losses by producing at the rate of output where ATC is minimized.

Question

Quizplus · Accepted Answer

When price exceeds average variable cost but not average total cost, the firm is covering its variable costs but not its fixed costs. Shutting down is not the best option as it will result in a loss equal to fixed costs. Producing at the rate of output where MR=MC will allow the firm to maximize its profits in the short run by producing up to the point where the marginal revenue earned from selling an additional unit is equal to the marginal cost of producing that unit. Minimizing per-unit losses by producing at the rate of output where ATC is minimized in the short run is not the best choice as it does not take into account the revenue generated from producing and selling the product. Minimizing total losses by producing at the rate of output where ATC is minimized is not a viable option as the firm will still be incurring losses.

When Price Exceeds Average Variable Cost but Not Average Total