A profit-maximising firm continues to operate even though it is losing money. It sells its product at a price of $100. From these facts we can deduce that:

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BlackTom AI · Accepted Answer

To approach this question, I’ll walk through what the given facts imply about costs and pricing in the short run.
Option a: Average variable cost is less than $100. This is consistent with a profit-maximising firm choosing to operate despite losses. If price (P) is $100 and P > AVC, the firm covers variable costs and contributes to fixed costs, so continuing production is rational in the short run even when total costs exceed total revenue.
Option b: Average fixed cost is less than $100. While AFC can be a sizable portion of total costs, its relation to the price alone doesn’t determine the decision to operate. The firm could have AFC greater than, equal to, or less than $100 depending on fixed costs and output, but the key driver for the shutdown decision is whether price covers variable costs, not fixed costs.
Option c: Average total cost is less than $100. If ATC were below $100, the firm would be turning a profit at this output level (since price equals $100). However, the premise states the firm is losing money, so ATC must be at least $100 or higher; therefore this option is incompatible with the given situation.
Option d: Marginal cost is decreasing. The statement about marginal cost being decreasing does not directly explain why a firm would continue operating while losing money. Shutdown decisions are governed by whether price covers average variable cost, not by the behavior of marginal cost alone, so this option misidentifies the key criterion.
Overall, the only option that aligns with the condition P = $100 and the firm choosing to operate despite losses is that average variable cost must be less than $100, enabling the firm to cover variable costs and contribute to fixed costs.

A profit-maximising firm continues to operate even though it is losing money. It sells its product at a price of $100. From these facts we can deduce that:

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