Chapter 11R, Problem 12MCQ

To determine

The correct option for given situation where Person T is to decide about shutting down its business or continue when price is above AVC and below ATC.

Answer to Problem 12MCQ

Option b is correct answer.

Explanation of Solution

Explanation for correct option:

b.

Person T should shut down its business immediately as its market price is lower than the ATC. If Person T continues to sell or produce then it involve higher cost of production as compared to price. Therefore, option b is correct.

Explanation for incorrect options:

a.

If production is continued to next year tehn it will only increase the average total as the firm will incur losses only when price is below the average total cost. Therefore, option a is incorrect.

c.

In long run, firm also seeks to cover its fixed cost rather merely covering its VC does not work. In long-run, Person T should discontinue the production if price is below the ATC. Therefore, option c is incorrect.

d.

Person T is unable to cover its average fixed cost as the market price is below the average total cost. Therefore, option d is incorrect.

e.

As the price is below the average total cost, the further production will increase the losses in long run. In long-run, it is worthless to continue as the cost will increase ultimately.. Therefore, option e is incorrect.

Economics Concept Introduction

Shut-down rule: In short-run, shut down price refers to the price per unit that is below the average variable cost per unit. The output level at which price is lower than the average variable cost then firm should shut it down. In long run, the firms should discontinue its production if its price is below the average total cost.