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Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith shouldA. Shut down her business in the short run but continue to operate in the long run. B. Continue to operate in the short run but shut down in the long run. C. Continue to operate in both the short run and long run. D. Shut down in both the short run and long run.

Respuesta :

isyllus

Answer:  Mrs. Smith should continue to operate in the short run but shut down in the long run.

Explanation:

Given: Current market price = $8.10

Average variable cost = $8.00

Average total cost = $8.25

In short run, a firm chooses to operate if they are able to recover their variable cost. Since in this case variable cost is less than current market price, therefore the firm will decide to operate.

whereas;

In long run, a firm chooses to operate only if they are capable to recover their average total cost and in this case the market price is less than the current market price. Therefore, the firm will shut down.

Therefore, the correct option is (b)

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