Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
A)shut down her business in the short run but continue to operate in the long run.
B)continue to operate in the short run but shut down in the long run.
C)continue to operate in both the short run and long run.
D)shut down in both the short run and long run.

Question

Quizplus · Accepted Answer

In the short run, Mrs. Smith should shut down her business because her average variable cost is higher than the market price. This means that she is not generating enough revenue to cover her variable costs and is making a loss. In the long run, she should shut down because her average total cost is higher than the market price which indicates that she is not covering all of her costs including fixed costs. Therefore, she cannot make a profit in the long run and should shut down her business.

Mrs Smith Operates a Business in a Competitive Market