In the perfectly competitive guidebook industry, the market price is $35. A firm is currently producing 10,000 guidebooks; average total cost is $38, marginal cost is $30, and average variable cost is $30. The firm should:

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Business

Derek Sharp

17 October, 11:17

In the perfectly competitive guidebook industry, the market price is $35. A firm is currently producing 10,000 guidebooks; average total cost is $38, marginal cost is $30, and average variable cost is $30. The firm should:

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Nina Lambert · Answer 1

A firm shuts down in the long run when the price of the good it is producing falls below the minimum average total cost, because in the long run the firm wont be able to make any profit. In the short run the firm only shuts down if the the price of the good falls below the minimum average variable cost because in the short run the firm has already payed the fixed costs and these costs are sunk costs so if the price of the good is more than the variable cost then they can minimize their losses.

In this case the price is $35 and the average variable cost is $30 so this means that the firm should continue working in the short run because it has already incurred the fixed costs and by working in the short run it can minimize its losses.

The firm should shut down in the long run as the average total cost which is $38 is more than the price $35.