Chapter 59, Problem 7MCQ

To determine

To determine the relationship between price and average fixed and variable costs.

Answer to Problem 7MCQ

(c) all of its variable costs but only some of the fixed costs.

Explanation of Solution

When the price is between the ATC and AVC, it means the firm is incurring losses and is not able to recover all its costs from the price of the output. The price is above the AVC which implies that the price is high enough to cover per unit variable cost. If the price is lying between ATC and AVC, the firm can cover part of its per-unit fixed costs. Hence (c) is the correct answer.

At this level of production, the firm would be incurring losses in form of part of average fixed costs due to the price not being able to cover all the per unit costs. Option (a), (b), (d), and (e) are incorrect answers. At this price level, a firm cannot cover its costs and generate profit and will incur a loss.

Economics Concept Introduction

Introduction:

In a perfectly competitive market, a firm will be producing at profit maximizing level in the short run if the price is above the minimum average variable costs, that is the firm can recover it's per unit variable costs. When the price is above the average variable cost at any level of production, the firm can cover the variable cost and some of or all of its fixed cost depending upon if the price is higher or lower than the average total cost and will continue its production in the short run.