If price is greater than average variable cost, then the firm
A) should cease production
B) earns economic profits
C) just breaks even
D) makes an economic loss
E) may make either an economic profit or loss

Question

Quizplus · Accepted Answer

When price is greater than average variable cost, the firm covers its variable costs and contributes to covering its fixed costs. This situation does not guarantee economic profit but allows the firm to operate without incurring additional losses from shutting down. Whether the firm makes an economic profit or loss depends on how much of the fixed costs can be covered by the revenue exceeding the variable costs.

If Price Is Greater Than Average Variable Cost, Then the Firm