Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information, the firm should

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We start by restating the given information and what it implies for output decision in perfect competition. - The firm is operating where MR = MC, since MR equals MC at 12, the profit-maximizing (or loss-minimizing) output occurs where MR = MC. - It is also given that MC = AVC at $10 and MC = ATC at $15. This means: at the output where MC = 12, the corresponding AVC must be below 12 (since MC > AVC to the right of the MC = AVC intersection), and the corresponding ATC must be above 12 (since MC < ATC to the left of MC = ATC intersection). In other words, price (MR) of 12 covers average variable cost but is less than average total cost. Now, evaluate each answer choice: Option 1: "operate in the short run, even though it will sustain a loss". This is correct reasoning: because MR (price) exceeds AVC, the firm covers its variable costs and should continue producing in the short run to minimize losses. The fact that ATC is higher than price means there is a per-unit loss, but not shutting down is optimal when price > AVC. Option 2: "operate in the long run, because it will make an economic profit of $3 per unit". This is incorrect. If price is 12 and ATC at the relevant output is above 12, the firm does not earn profit; it incurs a loss per unit. Moreover, long-run decisions hinge on covering ATC, which is not happening here. Option 3: "operate in the short run, because it will make an economic profit of $3 per unit". This is inconsistent with the ATC being greater than price; an economic profit of 3 would require price to exceed ATC, which the data do not support. Option 4: "operate in the short run, but decrease output to decrease its cost". Since MR = MC at the chosen output, there is no automatic reason to reduce output; decreasing output would move MR ≠ MC and typically raise MC relative to MR, making you miss the profit-maximizing condition. Option 5: "close down in the short run". This would be appropriate only if MR < AVC. Here MR > AVC, so shutting down would be suboptimal in the short run. In summary, the only option that aligns with MR = MC and the given cost relationships (MR = 12, MC = AVC at 10, MC = ATC at 15) is that the firm should operate in the short run, even though it will sustain a loss due to price being below ATC but above AVC.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information, the firm should

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AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Assume that, for a perfectly competitive firm, marginal cost equals average variable cost at $10, marginal cost equals average total cost at $15, and marginal revenue equals marginal cost at $12. On the basis of this information, the firm should

View Explanation

Log in for full answers

Similar Questions

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Figure 14-1 Suppose that a firm in a competitive market has the following cost curves: ​ Refer to Figure 14-1. If the market price falls below $6, the firm will earn

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