Asked by Ashley Tyler on Apr 24, 2024
Verified
If at the MC = MR output,AVC exceeds price:
A) new firms will enter this industry.
B) the firm should produce the MC = MR output and realize an economic profit.
C) some firms should shut down in the short run.
D) the firm should expand its plant.
MC
Marginal Cost, the cost incurred from producing one additional unit of a good or service.
AVC
Average Variable Cost refers to the variable costs (such as labor and materials) per unit of output produced.
MR Output
The output level where marginal revenue equals marginal cost, guiding firms in maximizing their profitability.
- Establish the criteria for a corporation to continue or cease its production activities in the short-run phase.
Verified Answer
EW
Elizabeth WilhelmsonMay 02, 2024
Final Answer :
C
Explanation :
If AVC exceeds price at the MC = MR output, it means that the firm is not covering its variable costs and is making a loss. In the short run, some firms should shut down as they are not able to cover their variable costs. This will decrease the supply in the market and help to bring the price back up to the breakeven point in the long run. Option A is not a correct choice because new firms entering the industry will increase the supply and lower the price even further. Option B is not feasible because the firm is not covering its costs and is making a loss, so it cannot make a profit. Option D is also not a feasible choice because expanding the plant will increase the fixed costs and worsen the situation.
Learning Objectives
- Establish the criteria for a corporation to continue or cease its production activities in the short-run phase.