-In Exhibit I-6, the price is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true in the short run? A) Price ATC and the firm is earning a positive profit. E) Price AVC, and the firm should stay at its current output.

Question

-In Exhibit I-6, the price is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true in the short run?
A) Price < AVC and this firm should shut down. 
B) This firm is earning a profit of zero. 
C) This firm could increase profits by increasing output. 
D) Price > ATC and the firm is earning a positive profit. 
E) Price > AVC, and the firm should stay at its current output.

Quizplus · Accepted Answer

When a firm is operating where MR = MC, it is maximizing its profits or minimizing its losses. If the price is above AVC (Average Variable Cost), the firm covers its variable costs and contributes to fixed costs, so it should continue operating in the short run. Shutting down is only considered if the price falls below AVC, as the firm would not be able to cover its variable costs.

-In Exhibit I-6, the Price Is Fixed at $35