Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00, and her average variable cost of production is $6.00. Which of the following statements about Mrs. Smith's firm is correct?
A)Mrs. Smith is earning a loss and should shut down in the short run.
B)Mrs. Smith is earning a loss but should continue to operate in the short run.
C)Mrs. Smith is earning a profit since the price is above the average variable cost.
D)Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in business or shut down.

Question

Quizplus · Accepted Answer

Mrs. Smith's firm is earning a loss in the short run ($6.50 < $7.00), but since the price is above the average variable cost ($6.50 > $6.00), she should continue to operate in the short run and try to minimize her losses.

Mrs Smith Is Operating a Firm in a Competitive Market