Question

For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200 units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of the following statements is correct?
a. In the short run, the firm will shut down if the price of its product is $14.
b. In the long run, the firm will shut down if the price of its product is $11.
c. For this firm, the minimum value of variable cost (VC) is $2,400.
d. If the firm’s fixed cost (FC) amounts to $500, then the firm cannot earn a positive profit unless the price of its product exceeds $16.

Answer 1

Answer:

The answer is: ALL THE OPTIONS ARE WRONG

Explanation:

A) In the short run, the firm will shut down if the price of its product is < $12.

B) In the long run, the firm will shut down if the price of its product is < $15.

C) The minimum value of variable cost equals the variable cost of producing 1 single unit, not the variable cost of producing 200 units.

D) If the firm's fixed costs are $500, it means that they decreased. According to the question the fixed costs were $690 (230 units x $3 per unit). So if the fixed costs decrease, then the average total cost should also decrease, not increase to $16.