Sia
Question
Microeconomics
Posted 9 months ago
The cost and revenue curves for a perfectly competitive industry are shown in this graph:
What best describes how a firm would respond in the short-run?
Choose 1 answer:
(A) Exit the industry
(B) Shut down
(c) Increase output to decrease average total cost
(D) Charge a higher price
(E) Increase output to increase revenue
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Answer from Sia
Posted 9 months ago
Solution
a
Identify the curves: The graph shows Marginal Cost (MC), Average Total Cost (ATC), Average Variable Cost (AVC), and Demand = Marginal Revenue (D = MR)
b
Short-run decision rule: In the short run, a firm will continue to produce as long as the price (P) is greater than or equal to the Average Variable Cost (AVC)
c
Compare price and AVC: The horizontal yellow line (D = MR) represents the market price. If this line is above the AVC curve, the firm will continue to produce
Answer
(C) Increase output to decrease average total cost
Key Concept
Short-run production decision
Explanation
In the short run, a firm in a perfectly competitive market will continue to produce as long as the price is above the AVC. If the price is above AVC but below ATC, the firm will produce to minimize losses. If the price is above ATC, the firm will produce to maximize profit.
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