Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC.Given this,the firm:

A) minimizes losses by producing at the minimum point of its AVC curve.
B) maximizes profits by producing where MR = ATC.
C) should close down immediately.
D) should continue producing in the short run but leave the industry in the long run if the situation persists.

Question

Madison Cogdill · Accepted Answer

Final Answer : D, Explanation :  The firm should continue producing in the short run because the price is above the minimum AVC point, allowing the firm to cover its variable costs and some of its fixed costs. However, since the price is below the ATC, the firm is still incurring losses. Therefore, in the long run, the firm should leave the industry if the situation persists, as it cannot continue to sustain losses indefinitely.

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