Question

Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. continue to operate in the short run but shut down in the long run. b. shut down in both the short run and long run. c. shut down her business in the short run but continue to operate in the long run. d. continue to operate in both the short run and long run.

Answer 1

Answer:

correct option is  b. shut down in both the short run and long run

Explanation:

given data

current market price = $7.50

average variable cost = $8.00

average total cost = $8.25

solution

we know here that as long as the current market price is here $7.50

that is below average variable costs = $8.00

so the firm will shut down in both the short run and long run

so correct option is  b. shut down in both the short run and long run