Mrs. Smith operates a business in a competitive market. The current market price is $8.10. 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

Mrs. Smith should continue to operate in the short run because the price ($8.10) is greater than the average variable cost ($8.00), covering her variable costs and contributing to fixed costs. However, since the price is less than the average total cost ($8.25), she is making a loss, so she should shut down in the long run if conditions do not improve.

Mrs Smith Operates a Business in a Competitive Market