Use the figure to answer the following question(s).
Figure 9-5

If the market price in Figure 9-5 fell to $2.50, what should the firm do?
A) raise its price
B) shut down and wait for conditions to improve
C) continue operating in the short run if it expects conditions to improve
D) go out of business immediately

Question

Use the figure to answer the following question(s).
Figure 9-5

If the market price in Figure 9-5 fell to $2.50, what should the firm do?
A) raise its price 
B) shut down and wait for conditions to improve 
C) continue operating in the short run if it expects conditions to improve 
D) go out of business immediately

Quizplus · Accepted Answer

The firm should continue operating in the short run if it expects conditions to improve. The figure shows that the firm's average variable cost is $2.00, which is less than the market price of $2.50. Therefore, the firm is still able to cover its variable costs and make a contribution towards its fixed costs. In the short run, it is better for the firm to continue to operate and cover as much of its fixed costs as possible, while waiting for conditions to improve. Going out of business immediately or shutting down and waiting for conditions to improve both result in the firm incurring unnecessary losses. Raising the price may not be feasible as it may lead to a decrease in demand for the product, leading to further losses.

Use the Figure to Answer the Following Question(s)