If the price is less than the average costs but higher than the average variable costs ?
Correct answer: C. The firm is making a loss but will continue to produce in the short term
- A. The firm is making a loss and will shutdown in the short term
- B. The firm is making a profile
- C. The firm is making a loss but will continue to produce in the short term
- D. The firm is making a loss and is making a negative contribution to fixed costs
Explanation
When price is below average cost but above average variable cost, the firm incurs a loss but covers all variable costs and contributes something toward fixed costs. It therefore continues producing in the short run rather than shutting down.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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